Business Cycle Models with Labor market friction
Outline:
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Optimal Monetary Policy - NK model
There are two main distortions in the New Keynesian model: 1. markups due to imperfect competition (leads to low employment in the long run): we assume that it is controlled by the fiscal authority.
New Keynesian Model (NK)
NK model takes the RBC model backbone and adds to that the price stickiness. To incorporate price stickiness we assume that firms are price-setters and thus move away from the perfect competition assumption.