Labor market participation,unemployment and monetary policy |
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| Institution: | 1. Università di Verona, Italy;2. Bank of Canada, 234 Laurier Avenue West, Ottawa, Ontario, Canada K1A 0G9;1. University of California, Santa Barbara, USA;2. Federal Reserve Bank of Dallas, Research Department, 2200 N. Pearl St., Dallas, TX 75201, USA;1. Kellogg School of Management, Northwestern University, Evanston, IL 60208, USA;2. Department of Economics, Vanderbilt University, Nashville, TN 37235, USA;1. Bates College, United States;2. Johns Hopkins University, United States;3. NBER, United States;4. Inter-American Development Bank, United States;1. HEC Montréal, Institute of Applied Economics, 3000, chemin de la Côte-Sainte-Catherine, Montréal (Québec), Canada;2. Bank of Canada, 234 Wellington St, Ottawa, ON K1A 0G9, Canada;3. North Carolina State University, Department of Economics, 2801 Founders Drive, 4150 Nelson Hall, Box 8110, 27695-8110 Raleigh, NC, USA |
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| Abstract: | Models of unemployment and monetary policy usually assume constant participation. Incorporating a participation decision into a standard New Keynesian model with matching frictions, we show that market tightness becomes endogenously more volatile because both the opportunity cost of home production and the reservation wage vary with participation. The model can simultaneously explain the low volatility of participation, the high volatility of unemployment, and a procyclical workers? outside option of working. A policy of strict inflation targeting is close to optimal, and increasing the response of the interest rate to inflation does not have a large impact on the volatility of unemployment because of the endogenous response of participation. |
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| Keywords: | Matching frictions Endogenous participation Monetary policy |
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