Unemployment Fluctuations and Stabilization Policies Zeuthen Lecture Book Series Karl Gunnar Persson, editor Modeling Bounded Rationality Ariel Rubinstein Forecasting Non-stationary Economic Time Series Michael P. Clements and David E. Hendry Political Economics: Explaining Economic Policy Torsten Persson and Guido Tabellini Wage Dispersion: Why are Similar Workers Paid Differently? Dale T. Mortensen Competition and Growth: Reconciling Theory and Evidence Philippe Aghion and Rachel Griffith Product Variety and the Gains from International Trade Robert C. Feenstra Unemployment Fluctuations and Stabilization Policies: A New Keynesian Perspective Jordi Gal´ı Unemployment Fluctuations and Stabilization Policies A New Keynesian Perspective Jordi Gal´ı The MIT Press Cambridge, Massachusetts London, England c 2011 Massachusetts Institute of Technology All rights reserved. No part of this book may be reproduced in any form by any electronic or mechanical means (including photocopying, recording, or information storage and retrieval) without permission in writing from the publisher. For information about special quantity discounts, please email special
[email protected] This book was set in Palatino by Aptara Inc. Printed and bound in the United States of America. Library of Congress Cataloging-in-Publication Data Gal´ı, Jordi, 1961– Unemployment fluctuations and stabilization policies : a new keynesian perspective / Jordi Gal´ı. p. cm. – (Zeuthen lectures) Includes bibliographical references and index. ISBN 978-0-262-01597-4 (hardcover : alk. paper) 1. Unemployment. 2. Unemployment – Government policy. 3. Monetary policy. 4. Keynesian economics. I. Title. HD5707.5.G36 339.5’3 – dc22 10 9 8 7 2011 2010047659 6 5 4 3 2 1 For Ellen Contents Series Foreword Preface 1 2 3 4 ix xi Introduction 1 A Simple Model of Unemployment and Inflation Dynamics 7 Unemployment, the Output Gap, and the Welfare Costs of Economic Fluctuations 3