Asymmetric unemployment uctuations and monetary policy trade-o s

I show that a trade-o between in ation volatility and average unemployment arises in a New Keynesian model with search and matching frictions in the labor market. In this environment, unemployment rises more and faster in a recession than it decreases in an expansion. A monetary authority focused solely on stabilizing in ation exacerbates labor market volatility and leads to higher average unemployment. When the model is calibrated to the U.S. economy, the welfare gains of adopting the optimal policy rather than a policy of price stability are found to be substantial. Moreover, the bulk of those welfare gains arises from the increase in mean employment achieved by the Ramsey policymaker. This result points to the importance of the asymmetric nature of unemployment uctuations in shaping monetary policy trade-o s. The introduction of imperfect unemployment insurance does not change the results in a signi cant way.