Jordi Gali (CREI and UPF)

“Insider-Outsider Labor Markets, Hysteresis and Monetary Policy”

Abstract

I develop a version of the New Keynesian model with insideroutsider labor markets and hysteresis that can account for the high persistence of of European unemployment. I study the implications of that environment for the design of monetary policy. A simple interest rule that includes the unemployment rate is shown to approximate well the optimal policy.