Unemployment,Optimal Monetary Policy And Welfare In Open Economy

Unemployment is a long-term problem in economic activities that has attracted wide attention.Due to the presence of unemployment caused by various reasons such as information asymmetry,labor market friction and economic development structure,full employment has become one of the four goals of macroeconomics.Governments and central banks also take the unemployment rates as important economic statistical indicators,and regard the promotion of employment as a long-term objective.Monetary policy is an important tool for the central bank and the government to regulate the economy respectively.Optimal monetary policy is often studied by New Keynesian macroeconomists.Economists often calculate the welfare function and minimize the welfare loss to get the optimal monetary policy.So,for a country,which is especially in the open economic environment,what mechanisms and channels the effects of unemployment on welfare was produced through? When choosing the optimal monetary policy,should we consider the unemployment? If it is necessary to take the unemployment into account,what kind of change does unemployment make on the optimal monetary policy? This series of questions is worth exploring and discussing.However,the outbreak and spread of the COVID-19 in the end of 2019 have affected the global economy as a "black swan" event.The Chinese government quickly launched a series of measures to prevent and control the epidemic,mainly including quarantine and restriction of personnel flow.In the first quarter,factories and enterprises delayed the start time of work and many service activities were cut down.As the epidemic spread around the world,Western countries have also taken restrictive measures,making prevention a top priority.This has led to a sharp contraction of the economy,a rapid decline in consumer demand and labor supply,and the trade between countries and regions has also been hindered.What,then,will happen to the unemployment and optimal monetary policy under the impact of an epidemic?This paper establishes a New Keynesian small open economy model,introducing unemployment and labor market friction into the basic model with real wage stickiness and price stickiness.Through the dynamic equilibrium system,we get the welfare loss function and the optimal monetary policy.And based on simulations for quantitative analysis,further conclusions are drawn.First of all,adopting Blanchard and Gali(2010)method to introduce the labor market friction and unemployment,we build a small open economy with unemployment,staggered wage,and price stickiness,based on the Gali and Monacelli(2016)model.Then we study in an open economy,the impact of unemployment and wage stickiness to optimal monetary policy and social welfare.The main conclusions are as follows :(1)The influence of wage stickiness on welfare is not monotonous,too large or too small wage stickiness will aggravate the fluctuation of unemployment,thus reducing welfare;(2)The rise of unemployment rate is one of the reasons for the loss of social welfare.When choosing the optimal monetary policy,the trade-off between inflation target and unemployment target should be considered;(3)When discussing unemployment(labor market friction)in an open environment,foreign consumption,output and exchange rate will have an impact on domestic employment through trade channels,and the higher the degree of openness,the greater the impact will be.Compared with a closed economy,when considering unemployment in an open environment,we should also pay attention to the impact of foreign variables.Secondly,we lay out a currency union with unemployment,staggered wage,and price stickiness,on the basis of Gali and Monacelli(2008),and Blanchard and Gali(2010).For studying the effects of unemployment on the optimal monetary policy of the union and the optimal fiscal policy made by the member country.In a monetary union,the monetary authority sets a common monetary policy,whereas each member country can make its own fiscal policy by choosing government spending.The main conclusions are as follows: first,adding the unemployment into the model,the optimal monetary policy of the central bank of the monetary union is no longer to stabilize inflation,but to balance the three goals of stabilizing inflation,reducing unemployment and reducing the pressure generated by the fiscal policies of member countries.Second,for the policy makers of member countries,a unified monetary policy cannot meet the second-best policy objectives.It also requires a policy trade-off between reducing unemployment and stabilizing the fiscal gap.Finally,we introduce the consumption demand shock and labor supply shock in the first New Keynesian small open economy model to study the unemployment and optimal monetary policy under the impact of the new crown epidemic.The main conclusion is as follows.From the impulse response of simulation,the impact of negative consumption demand shock and labor supply shock on the main variables in the economy is clearly depicted.And the transmission mechanism of the rapid economic decline in the short term caused by the COVID-19 shock is analyzed.Policymakers should focus on inflation and unemployment at the same time.The central bank is suggested to implement expansionary monetary policy to increase liquidity and stimulate consumer demand.At the same time,to resume production reasonably and orderly is necessary.Furthermore creating jobs and encouraging technological innovation is useful to promote the transformation of economic structure and healthy development.