Labor Markets And Monetary Policy: A New-keynesian Model With Unemployment

The authors construct a utility-based model of fluctuations, with nominal rigidities and unemployment, and draw its implications for the unemployment-inflation tradeoff and for the conduct of monetary policy. They proceed in two steps. They first leave nominal rigidities aside. They show that, under a standard utility specification, productivity shocks have no effect on unemployment in the constrained efficient allocation. They then focus on the implications of alternative real wage setting mechanisms for fluctuations in unemployment. They show the role of labor market frictions and real wage rigidities in determining the effects of productivity shocks on unemployment.