Welfare-based optimal monetary policy with unemployment and sticky prices: A linear-quadratic framework
University of California, Santa Cruz
New Keynesian DSGE model with Mortensen-Pissarides search and matching frictions in the labor market, Calvo sticky prices in retail sector, Nash wage bargaining with stochastic bargaining shares, and home production for unemployed workers
wholesale firms: competitive market, CRS production with labor, search frictions for hiring; retail firms: monopolistic competition, Calvo pricing, CRS transformation of wholesale goods
Table 2
Welfare-based optimal commitment policy with Hosios condition satisfied; zero inflation is optimal when steady state is efficient
Authors derive welfare-based optimal policy showing price stability (zero inflation) is nearly optimal; this is the benchmark Ramsey solution