Kiel Working Papers, Kiel Institute for World Economics
No 1335:
A New Keynesian Model with Unemployment
Olivier Blanchard and Jordi Gali
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 Key- nesian 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 effcient 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.
Keywords: new Keynesian model, labor market frictions, search model, unemployment, sticky prices, real wage rigidities; (follow links to similar papers)
JEL-Codes: E32,; E50; (follow links to similar papers)
43 pages, June 2007
Before downloading any of the electronic versions below
you should read our statement on
copyright.
Download GhostScript
for viewing Postscript files and the
Acrobat Reader for viewing and printing pdf files.
Downloadable files:
kap1335.pdf 
Download Statistics
Report other problems with accessing this service to Sune Karlsson ()
or Helena Lundin ().
Programing by
Design Joakim Ekebom
