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Stabilisation, Policy Targets and Unemployment in Imperfectly Competitive Economies
Author(s) -
Bratsiotis George,
Martin Christopher
Publication year - 1999
Publication title -
scandinavian journal of economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.725
H-Index - 64
eISSN - 1467-9442
pISSN - 0347-0520
DOI - 10.1111/1467-9442.00155
Subject(s) - economics , unemployment , monetary policy , inflation (cosmology) , inflation targeting , full employment , monetary economics , intuition , misery index , central bank , macroeconomics , keynesian economics , philosophy , physics , epistemology , theoretical physics
This paper argues that the rate of equilibrium unemployment depends on the objectives of the Central Bank. In a model where the Central Bank uses monetary policy to stabilise the economy, we show that unemployment and inflation will be lower with an inflation target than with targets for output, money or nominal GDP. The intuition for this is that the elasticities of demand in both the product and the labour markets are greater when there is an inflation target; we show that this leads to a lower mark‐up of price over marginal cost and makes wages more sensitive to unemployment.