Labor turnover costs, workers' heterogeneity, and optimal monetary policy

Arbeitspapier

We study the design of optimal monetary policy in a New Keynesian model with labor turnover costs in which wages are set according to a right to manage bargaining where the firms' counterpart is given by currently employed workers. Our model captures well the salient features of European labor market, as it leads to sclerotic dynamics of worker flows. The coexistence of those types of labor market frictions alongside with sticky prices gives rise to a non-trivial trade-off for the monetary authority. In this framework, firms and current employees extract rents and the policy maker finds it optimal to use state contingent inflation taxes/subsidies to smooth those rents. Hence, in the optimal Ramsey plan, inflation deviates from zero and the optimal volatility of inflation is an increasing function of firing costs. The optimal rule should react to employment alongside inflation.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: IZA Discussion Papers ; No. 4322

Classification and Topics

• Classification: Wirtschaft ; Monetary Policy ; Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
• Subject: Optimal monetary policy ; hiring and firing costs ; labor market frictions ; policy trade-off ; Geldpolitik ; Arbeitsmobilität ; Kündigung ; Kosten ; Lohnverhandlungen ; Lohnrigidität ; Preisrigidität ; Regelgebundene Politik ; Inflationsrate ; Ungleichgewichtstheorie ; Theorie

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Faia, Ester ; Lechthaler, Wolfgang ; Merkl, Christian
• Event: Veröffentlichung
• (who): Institute for the Study of Labor (IZA)
• (where): Bonn
• (when): 2009

Further information

• Handle: http://hdl.handle.net/10419/36174
• URN: urn:nbn:de:101:1-20090825618
• Last update: 10.03.2025, 11:43 AM CET