A tractable incomplete-market model with endogenous unemployment risk, sticky prices, real wage rigidity and a fiscal side is calibrated to Euro Area countries and used to analyze the macroeconomic effects of lockdown policies. Modeling them as a shock to the extensive margin of labor adjustment – a rise in separations – produces large and persistent negative effects on output, unemployment and welfare, raises precautionary savings and lowers inflation, in line with early evidence about inflation dynamics. Modeling lockdowns as a shock to the intensive margin – a fall in labor utilization – produces small and short-lived macroeconomic and welfare effects, and implies a counterfactual rise in inflation. Conditional on a lockdown (separation) shock, raising public spending or extending UI benefits by large amounts is much more effective in stimulating the economy than during normal times. Quantitatively however, the ability of such policies to flatten the output and unemployment curves remains limited, even though these policies can alleviate a reasonable share of the aggregate welfare losses from the lockdown.
Firms constantly seek to develop and commercialize new goods to satisfy consumer needs. This process of creation and destruction of product varieties has important implications for competition in goods markets and consumer welfare. According to Bernard et al. (2009), product creation typically accounts for a large share of national output. Since it also crucially affects the dynamics of inflation through its effect on competition, taking this process into account may challenge traditional views on monetary policy design and transmission. In this paper, we find that changes in the range of products available to consumers matter for our understanding of business cycles and the conduct of monetary policy in open economies. Our evaluation of the welfare implications of alternative monetary policy rules shows the importance of product varieties in the design of monetary policy. Much theoretical literature has found that price stability should be the key objective of monetary policy. Considering product creation in an open economy changes this policy recommendation, since welfare is higher when central banks respond moderately to output fluctuations in addition to responding to inflation.
scite is a Brooklyn-based organization that helps researchers better discover and understand research articles through Smart Citations–citations that display the context of the citation and describe whether the article provides supporting or contrasting evidence. scite is used by students and researchers from around the world and is funded in part by the National Science Foundation and the National Institute on Drug Abuse of the National Institutes of Health.
hi@scite.ai
10624 S. Eastern Ave., Ste. A-614
Henderson, NV 89052, USA
Copyright © 2024 scite LLC. All rights reserved.
Made with 💙 for researchers
Part of the Research Solutions Family.