The effectiveness of labor market indicators for monetary policy has not yet been theoretically established despite their practical significance to practitioners. To bridge the gap between theory and practice, this paper investigates whether labor market indicators may improve the efficiency of monetary policy implementation by providing the monetary authority with timely information about current economic conditions. To this end, a small open macroeconomic model with endogenous involuntary unemployment is constructed, estimated, and simulated based on the Korean economy. We find that a monetary policy rule augmented by labor market indicators outperforms one using a conventional output gap in terms of social welfare.
The authors would like to thank two anonymous referees and the editor for their constructive comments. This work was supported by the Ajou University Research Fund , and the authors are grateful for generous financial support from the National Assembly Budget Office of Korea . The authors also owe thanks to Yoon Gee Kim , Suk Ha Shin, Joonyoung Hur, and the seminar participants at the National Assembly Budget Office of Korea. The views expressed herein are those of the authors and should not be interpreted as those of the National Assembly Budget Office of Korea.
