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Monetary Policy and Unemployment in Open Economies

  • Philipp Engler

    ()

    (Freie Universität Berlin)

After an expansionary monetary policy shock employment increases and unemployment falls. In standard New Keynesian models the fall in aggregate unemployment does not affect employed workers at all. However, Luchinger, Meier and Stutzer (2010) found that the risk of unemployment negatively affects utility of employed workers: An increases in aggregate unemployment decreases workers' subjective well-being, which can be explained by an increased risk of becoming unemployed. I take account of this effect in an otherwise standard New Keynesian open economy model with unemployment as in Gali (2010) and find two important results with respect to expansionary monetary policy shocks: First, the usual wealth effect in New Keynesian models of a declining labor force, which is at odds with the data as high-lighted by Christiano, Trabandt and Walentin (2010), is shut down. Second, the welfare effects of such shocks improve considerably, modifying the standard results of the open economy literature that set off with Obstfeld and Rogoff's (1995) redux model.

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Paper provided by National Centre for Econometric Research in its series NCER Working Paper Series with number 77.

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Length: 365 pages
Date of creation: 09 Nov 2011
Date of revision:
Handle: RePEc:qut:auncer:2011_8
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  1. Rafael Wouters & Frank Smets & Jordi Gali, 2011. "Unemployment in an Estimated New Keynesian model," 2011 Meeting Papers 1451, Society for Economic Dynamics.
  2. Gary Hansen, 2010. "Indivisible Labor and the Business Cycle," Levine's Working Paper Archive 233, David K. Levine.
  3. John Bluedorn & Christopher Bowdler, 2006. "The Open Economy Consequences of U.S. Monetary Policy," Economics Papers 2006-W04, Economics Group, Nuffield College, University of Oxford.
  4. Erceg, Christopher J. & Henderson, Dale W. & Levin, Andrew T., 2000. "Optimal monetary policy with staggered wage and price contracts," Journal of Monetary Economics, Elsevier, vol. 46(2), pages 281-313, October.
  5. Maurice Obstfeld and Kenneth Rogoff., 1995. "Exchange Rate Dynamics Redux," Center for International and Development Economics Research (CIDER) Working Papers C95-048, University of California at Berkeley.
  6. Kevin X. D. Huang & Zheng Liu, 2003. "Business Cycles with Staggered Prices and International Trade in Intermediate Inputs," Emory Economics 0308, Department of Economics, Emory University (Atlanta).
  7. Paul R. Bergin, 2004. "How Well Can the New Open Economy Macroeconomics Explain the Exchange Rate and Current Account?," NBER Working Papers 10356, National Bureau of Economic Research, Inc.
  8. Giovanni Ganelli & Juha Tervala, 2007. "Public Infrastructures, Public Consumption, and Welfare in a New-Open-Economy-Macro Model," IMF Working Papers 07/67, International Monetary Fund.
  9. Tervala, Juha & Engler, Philipp, 2010. "Beggar-thyself or beggar-thy-neighbour? The welfare effects of monetary policy," Discussion Papers 2010/6, Free University Berlin, School of Business & Economics.
  10. Mathias Trabandt & Karl Walentin & Lawrence J. Christiano, 2010. "Involuntary Unemployment and the Business Cycle," 2010 Meeting Papers 129, Society for Economic Dynamics.
  11. Christian Merkl & Dennis Wesselbaum, 2011. "Extensive versus intensive margin in Germany and the United States: any differences?," Applied Economics Letters, Taylor & Francis Journals, vol. 18(9), pages 805-808.
  12. Stephanie Schmitt-Grohe & Martin Uribe, 2001. "Closing Small Open Economy Models," Departmental Working Papers 200115, Rutgers University, Department of Economics.
  13. Clark, Andrew E & Oswald, Andrew J, 1994. "Unhappiness and Unemployment," Economic Journal, Royal Economic Society, vol. 104(424), pages 648-59, May.
  14. Giancarlo Corsetti & Paolo Pesenti, 2001. "Welfare And Macroeconomic Interdependence," The Quarterly Journal of Economics, MIT Press, vol. 116(2), pages 421-445, May.
  15. Juha Tervala, 2010. "The International Transmission of Monetary Policy in a Dollar Pricing Model," Open Economies Review, Springer, vol. 21(5), pages 629-654, November.
  16. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
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