Kiel Working Papers, Kiel Institute for World Economics
No 1513:
The Role of Labor Markets for Euro Area Monetary Policy
Kai Christoffel, Keith Kuester and Tobias Linzert
Abstract: In this paper, we explore the role of labor markets for
monetary policy in the euro area in a New Keynesian model in which labor
markets are characterized by search and matching frictions. We first
investigate to which extent a more flexible labor market would alter the
business cycle behavior and the transmission of monetary policy. We find
that while a lower degree of wage rigidity makes monetary policy more
effective, i.e. a monetary policy shock transmits faster onto inflation,
the importance of other labor market rigidities for the transmission of
shocks is rather limited. Second, having estimated the model by Bayesian
techniques we analyze to which extent labor market shocks, such as
disturbances in the vacancy posting process, shocks to the separation rate
and variations in bargaining power are important determinants of business
cycle fluctuations. Our results point primarily towards disturbances in the
bargaining process as a significant contributor to inflation and output
fluctuations. In sum, the paper supports current central bank practice
which appears to put considerable effort into monitoring euro area wage
dynamics and which appears to treat some of the other labor market
information as less important for monetary policy
Keywords: Labor Market, wage rigidity, bargaining, Bayesian estimation; (follow links to similar papers)
JEL-Codes: E32,; E52,; J64,; C11; (follow links to similar papers)
58 pages, April 2009
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