We propose a monetary model in which the unemployed satisfy the official US definition
of unemployment: they are people without jobs who are (i) currently making
concrete efforts to find work and (ii) willing and able to work. In addition, our model
has the property that people searching for jobs are better off if they find a job than
if they do not (i.e., unemployment is ‘involuntary’). We integrate our model of involuntary
unemployment into the simple New Keynesian framework with no capital and
use the resulting model to discuss the concept of the ‘non-accelerating inflation rate of
unemployment’. We then integrate the model into a medium sized DSGE model with
capital and show that the resulting model does as well as existing models at accounting
for the response of standard macroeconomic variables to monetary policy shocks and
two technology shocks. In addition, the model does well at accounting for the response
of the labor force and unemployment rate to the three shocks.
Keywords: DSGE, unemployment, business cycles, monetary policy, Bayesian estimation.
JEL codes: E2, E3, E5, J2, J6