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Unemployment, Trade Openness and Optimal Monetary Policy

Author

Listed:
  • Jianhua Feng

    (China Economics and Management Academy, Central University of Finance and Economics)

  • Chan Wang

    (School of Finance, Central University of Finance and Economics)

  • Liyuan Wu

    (Guanghua School of Management and LMEQF, Peking University)

  • Dingsheng Zhang

    (China Economics and Management Academy, Central University of Finance and Economics)

Abstract

This paper studies how the monetary policymaker should conduct the monetary policy in a small open economy with labor market frictions.The welfare loss function shows that the monetary policymaker faces a stabilization trade-off between the PPI inflation and the unemployment rate gap. We find that the welfare gains from implementing the optimal monetary policy are small relative to the optimized simple rule. In addition, when conducting the optimized simple rule, the monetary policymaker should attach a greater weight to the unemployment rate gap when the economy is more open.

Suggested Citation

  • Jianhua Feng & Chan Wang & Liyuan Wu & Dingsheng Zhang, 2021. "Unemployment, Trade Openness and Optimal Monetary Policy," Annals of Economics and Finance, Society for AEF, vol. 22(1), pages 231-253, May.
    • Handle: RePEc:cuf:journl:y:2021:v:22:i:1:fengwangwuzhang
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Labor market frictions; Small open economy; Optimal monetary policy; Optimized simple policy rule;
    All these keywords.

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F16 - International Economics - - Trade - - - Trade and Labor Market Interactions
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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