reaction model for a Central Bank against shocks on labor market - Part I

Martin, José Manuel (2020): reaction model for a Central Bank against shocks on labor market - Part I.

Abstract

There’s a practical rule in financial and monetary economics: if unemployment rises, the economy needs stimulus, therefore, interest rates will fall. This rule of thumb is derived from the Phillips Curve and the Taylor rule. However, this effect is not formally included in those models. Thus, with small adjustments to the Phillips Curve and Taylor’s rule framework one can include the impact of shocks and expectations in the labor market, to overcome shocks on inflation and to improve the adjustments of central bank’s interest rate.

• Item Type: MPRA Paper
• Language: English
• Keywords: Econometrics, Central Bank, Inflation
• Subjects: D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D84 - Expectations ; Speculations; E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E31 - Price Level ; Inflation ; Deflation; N - Economic History > N1 - Macroeconomics and Monetary Economics ; Industrial Structure ; Growth ; Fluctuations

References

A. W. Phillips (1958), ‘The Relation between Unemployment and the Rate of Change of Money Wage Rates in the United Kingdom 1861–1957’ (1958) 25 Economica 283. Obtained from: https://doi.org/10.2307/2550759 John B. Taylor (1993), Discretion versus policy rules in practice (1993), Carnegie-Rochester Conference Series on Public Policy Volume 39, December 1993, Pages 195-214. Obtained from: https://doi.org/10.1016/0167-2231(93)90009-L