Monetary Policy Under Uncertainty in an Estimated Model with Labour Market Frictions

47 Pages Posted: 12 Jun 2008

See all articles by Luca Sala

Luca Sala

University of Bocconi - Innocenzo Gasparini Institute for Economic Research (IGIER)

Ulf Soderstrom

Bocconi University

Antonella Trigari

Bocconi University - Department of Economics

Date Written: May 2008

Abstract

We study the design of monetary policy in an estimated model with sticky prices, search and matching frictions, and staggered nominal wage bargaining. We find that the estimated natural rate of unemployment is consistent with the NBER description of the U.S. business cycle, and that the inflation/unemployment trade-off facing monetary policymakers is quantitatively important. We also show that parameter uncertainty has a limited effect on the performance or design of monetary policy, while natural rate uncertainty has more sizeable effects. Nevertheless, policy rules that respond to the output or unemployment gaps are more efficient than rules responding to output or unemployment growth rates, also in the presence of uncertainty about the natural rates.

Keywords: Labour market search, Monetary policy, Natural rate uncertainty, Parameter uncertainty, Unemployment

JEL Classification: E24, E32, E52, J64

Suggested Citation

Sala, Luca and Soderstrom, Ulf and Trigari, Antonella, Monetary Policy Under Uncertainty in an Estimated Model with Labour Market Frictions (May 2008). , Vol. , pp. -, 2008. Available at SSRN: https://ssrn.com/abstract=1143189

Luca Sala (Contact Author)

University of Bocconi - Innocenzo Gasparini Institute for Economic Research (IGIER) ( email )

Via Roentgen 1
Milan, 20136
Italy
+39 02 5836 3326 (Phone)

Ulf Soderstrom

Bocconi University ( email )

Via Sarfatti, 25
Milan, MI 20136
Italy

Antonella Trigari

Bocconi University - Department of Economics ( email )

Via Gobbi 5
Milan, 20136
Italy

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