Unemployment and monetary policy with large price setters and free entry

In a WS-PS model with large price and wage setters and free entry of firms in the goods market, the economy may exhibit multiple unemployment equilibria. We show that the effects of monetary policy on unemployment depend on the equilibrium at which the economy is located. In particular, we show that an anti-inflation policy reduces unemployment in the low unemployment equilibrium, but that such a policy leads to a rise in unemployment when the economy is already stuck in the high unemployment equilibrium. (c) 2007 Elsevier B.V. All rights reserved.