I 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...

cover -- Contents -- Series Foreword -- Preface -- Introduction -- A Simple Model of Unemployment and Inflation Dynamics -- Unemployment, the Output Gap, and the Welfare Costs of Economic Fluctuations -- Unemployment and Monetary Policy Design in the New Keynesian Model -- Concluding Remarks and...