DP9285 Notes for a New Guide to Keynes (I): Wages, Aggregate Demand, and Employment

Author(s): Jordi Galí
Publication Date: January 2013
Keyword(s): employment stability, Monetary policy rules, Wage flexibility
JEL(s): E32
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=9285

I revisit the General Theory's discussion of the role of wages in employment determination through the lens of the New Keynesian model. The analysis points to the key role played by the monetary policy rule in shaping the link between wages and employment, and in determining the welfare impact of enhanced wage flexibility. I show that the latter is not always welfare improving.