Stabilisation, policy targets and unemployment in imperfectly competitive economies

This paper argues that the rate of equilibrium unemployment depends on the objectives of the Central Bank. In a model where the Central Bank uses mone tary policy to stabilise the economy, we show that unemployment and inflati on will be lower with an inflation target than with targets for output, mon ey or nominal GDP. The intuition for this is that the elasticities of deman d in both the product and the labour markets are greater when there is an i nflation target; we show that this leads to a lower mark-up of price over m arginal cost and makes wages more sensitive to unemployment.