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A New Keynesian Model with Unemployment

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  • Blanchard, Olivier
  • Galί, Jordi

Abstract

We develop a utility based model of fluctuations, with nominal rigidities, and unemployment. In doing so, we combine two strands of research: the New Keynesian model with its focus on nominal rigidities, and the Diamond-Mortensen-Pissarides model, with its focus on labor market frictions and unemployment. In developing this model, we proceed in two steps. We first leave nominal rigidities aside. We show that, under a standard utility specification, productivity shocks have no effect on unemployment in the constrained e?cient allocation. We then focus on the implications of alternative real wage setting mechanisms for fluctuations in unemployment. We then introduce nominal rigidities in the form of staggered price setting by firms. We derive the relation between inflation and unemployment and discuss how it is influenced by the presence of real wage rigidities. We show the nature of the tradeoff between inflation and unemployment stabilization, and we draw the implications for optimal monetary policy.

Suggested Citation

  • Blanchard, Olivier & Galί, Jordi, 2006. "A New Keynesian Model with Unemployment," Kiel Working Papers 1335, Kiel Institute for the World Economy (IfW Kiel).
  • Handle: RePEc:zbw:ifwkwp:1335
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    References listed on IDEAS

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    More about this item

    Keywords

    new Keynesian model; labor market frictions; search model; unemployment; sticky prices; real wage rigidities;
    All these keywords.

    JEL classification:

    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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