{"title":"Optimal Monetary Policy with Government-Provided Unemployment Benefits","authors":"Mehrab Kiarsi","doi":"10.1515/bejm-2022-0114","DOIUrl":null,"url":null,"abstract":"Abstract This paper considers a standard New Keynesian model with matching frictions and explores the impact of modeling the opportunity cost of employment as government unemployment transfers. The findings reveal that under such circumstances, maintaining full price stability at all times ceases to be optimal. This outcome persists even when production subsidies are introduced to address inefficiencies caused by imperfect competition in product and factor markets, and when wages are fully flexible and the Hosios condition holds. For a realistic calibration of the opportunity cost, the Ramsey-optimal policy necessitates a positive inflation rate with high volatility. The degree of inflation volatility required increases with the magnitude of unemployment transfers. Consequently, committing to an inflation targeting regime proves to be highly costly in this context. Additionally, the study demonstrates that the optimal inflation variability decreases with workers’ bargaining power. This is because higher workers’ bargaining power leads to reduced labor market fluctuations, thereby lowering the need for large inflation adjustments.","PeriodicalId":45923,"journal":{"name":"B E Journal of Macroeconomics","volume":"11 12","pages":"0"},"PeriodicalIF":0.5000,"publicationDate":"2023-11-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":"0","resultStr":null,"platform":"Semanticscholar","paperid":null,"PeriodicalName":"B E Journal of Macroeconomics","FirstCategoryId":"1085","ListUrlMain":"https://doi.org/10.1515/bejm-2022-0114","RegionNum":4,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":null,"EPubDate":"","PubModel":"","JCR":"Q4","JCRName":"ECONOMICS","Score":null,"Total":0}
引用次数: 0
Abstract
Abstract This paper considers a standard New Keynesian model with matching frictions and explores the impact of modeling the opportunity cost of employment as government unemployment transfers. The findings reveal that under such circumstances, maintaining full price stability at all times ceases to be optimal. This outcome persists even when production subsidies are introduced to address inefficiencies caused by imperfect competition in product and factor markets, and when wages are fully flexible and the Hosios condition holds. For a realistic calibration of the opportunity cost, the Ramsey-optimal policy necessitates a positive inflation rate with high volatility. The degree of inflation volatility required increases with the magnitude of unemployment transfers. Consequently, committing to an inflation targeting regime proves to be highly costly in this context. Additionally, the study demonstrates that the optimal inflation variability decreases with workers’ bargaining power. This is because higher workers’ bargaining power leads to reduced labor market fluctuations, thereby lowering the need for large inflation adjustments.
期刊介绍:
The B.E. Journal of Macroeconomics publishes significant research and scholarship in both theoretical and applied macroeconomics. The journal\"s mandate is to assemble papers from the broad research spectrum covered by modern macroeconomics. The range of topics includes business cycle research, economic growth, and monetary economics, as well as topics drawn from the substantial areas of overlap between macroeconomics and international economics, labor economics, finance, development economics, political economy, public economics, and econometric theory.