Uninsured Unemployment Risk and Optimal Monetary Policy in a Zero-Liquidity Economy

摘要

In this paper, I have computed the optimal interest rate response to aggregate shocks in a model economy wherein workers have a precautionary motive against uninsured, endogenous unemployment risk. In this economy aggregate "supply" shocks such as productivity or cost-push shocks may have powerful aggregate demand effects due to the feedback loop between unemployment risk, desired savings, and aggregate demand. This loop calls for a response of the policy rate to aggregate shocks that is substantially more accommodative than under perfect insurance. However, provided that the appropriate correction to the policy rate is implemented, then the deflationary spiral is almost fully-if not completely-neutralized. In this sense, conditional on the appropriate correction to the policy rate, "incomplete markets do not matter" for the aggregate dynamics.