Kiel Working Papers, Kiel Institute for World Economics
No 1409:
Monetary Persistence and the Labor Market: A New Perspective
Wolfgang Lechthaler, Christian Merkl and Dennis Snower
Abstract: It is common knowledge that the standard New Keynesian
model is not able to generate a persistent response in output to temporary
monetary shocks. We show that this shortcoming can be remedied in a simple
and intuitively appealing way through the introduction of labor turnover
costs (such as hiring and firing costs). Assuming that it is costly to hire
and fire workers implies that the employment rate is slow to converge to
its steady state value after a monetary shock. Under reasonable
calibrations, the after-effects of a shock continue to exert an effect on
the labor market even long after the shock is over. The sluggishness of the
labor market translates to the product market and thus the output effects
of the monetary shock become more persistent. Our model is able to generate
a hump-shaped response in output, if the monetary shock includes a moderate
autoregressive component. This is another empirically well known feature,
which the standard model is not able to replicate
Keywords: Monetary Persistence, Labor Market, Hiring and Firing Costs; (follow links to similar papers)
JEL-Codes: E24,; E32,; E52,; J23; (follow links to similar papers)
26 pages, March 2008
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