Galí, Jordi, 1961-2025-05-162025-05-162022Galí J. Insider–outsider labor markets, hysteresis, and monetary policy. J Money Credit Bank. 2022 Feb;54(S1):53-88. DOI: 10.1111/jmcb.128980022-2879http://hdl.handle.net/10230/70422I develop a version of the New Keynesian model with insider-outsider labor markets and hysteresis that can account for the high persistence of European unemployment. I study the implications of that environment for the design of monetary policy. The optimal policy calls for strong emphasis on (un)employment stabilization which a standard interest rate rule fails to deliver, with the gap between the two increasing in the degree of hysteresis. Two simple targetiing rules are shown to approximate well the optimal policy. The properties of the model and e¤ects of di¤erent policies are analyzed through the lens of the labor wedge and its components.application/pdfengThis is the peer reviewed version of the following article: Galí J. Insider–outsider labor markets, hysteresis, and monetary policy. J Money Credit Bank. 2022 Feb;54(S1):53-88. DOI: 10.1111/jmcb.12898, which has been published in final form at http://dx.doi.org/10.1111/jmcb.12898. This article may be used for non-commercial purposes in accordance with Wiley Terms and Conditions for Use of Self-Archived Versions.info:eu-repo/semantics/articlehttp://dx.doi.org/10.1111/jmcb.12898Wage stickinessNew Keynesian modelUnemployment fluctuationsWage Phillips curveMonetary policy tradeoffsinfo:eu-repo/semantics/openAccess