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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.

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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.

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