Title: The welfare-adequate measure of wage dispersion in the basic DSGE model with unemployment
Authors: Przemyslaw Wlodarczyk - University of Lodz (Poland) [presenting]
Abstract: The emergence of the new class of DSGE models enabled assessment of the consequences of unemployment existence for the levels of aggregate welfare observed in an economy, as well as inference on the welfare implications of different strategies of monetary policy execution. However, as the analytical expressions of the welfare loss function are readily available only for relatively simple models, which exclude such complications as openness of the economy together with the role of exchange rates, in the majority of admissible and practically important cases we still have to resort to the numerical welfare comparisons in the vein of previous work. A welfare-adequate measure of wage dispersion in a standard DSGE model with wages set according to a previous formalism and unemployment introduced as in the literature is derived. The resulting social welfare function is then carefully analysed and welfare implications of unemployment are assessed using certain measures of welfare cost. We further compare the accuracy of the results with those obtained using the traditional Welfare Loss Function (WLF) based on the second-order approximation of the social welfare function around the steady state. The robustness of the results is checked by means of comparison with those obtained under different calibrations of the model and different monetary policy rules.