Unemployment, informality and optimal monetary policy, an evaluation of the cross-checking approach

ABSTRACT

This paper evaluate, in terms of simulated welfare loss, the cross-checking of a DSGE model’s loss function with a simple Taylor rule as a monetary policy framework for a central bank unable to commit to a target. We focus on Tunisia as an emerging economy with challenging characteristics for this technique, mainly high involuntary unemployment and an important informal sector. Our results confirm the effectiveness of this technique and the policy implication we derive is the superiority of cross-checking over discretion as an optimal monetary policy framework when the central bank is unable to commit to a target.