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Labor market reform and price stability: an application to the Euro Area

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  • Carlos Thomas

    ()
    (Banco de España)

  • Francesco Zanetti

    ()
    (Bank of England)

Abstract

This paper studies the effect of labor market reform, in the form of reductions in firing costs and unemployment benefits, on inflation volatility. With this purpose, we build a New Keynesian model with search and matching frictions in the labor market, and estimate it using Euro Area data. Qualitatively, changes in labor market policies alter the volatility of inflation in response to shocks, by affecting the volatility of the three components of real marginal costs (hiring costs, firing costs and wage costs). Quantitatively, we find however that neither policy is likely to have an important effect on inflation volatility, due to the small impact of changes in the volatility of the labor market on inflation dynamics.

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File URL: http://www.bde.es/f/webbde/SES/Secciones/Publicaciones/PublicacionesSeriadas/DocumentosTrabajo/08/Fic/dt0818e.pdf
File Function: First version, September 2008
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Bibliographic Info

Paper provided by Banco de Espa�a in its series Banco de Espa�a Working Papers with number 0818.

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Length: 37 pages
Date of creation: Sep 2008
Date of revision:
Handle: RePEc:bde:wpaper:0818

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Keywords: Labor market policies; Search and matching frictions; New Keynesian model;

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References

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Citations

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Cited by:
  1. Di Pace, Federico & Hertweck, Matthias S., 2012. "Labour Market Frictions, Monetary Policy, and Durable Goods," Annual Conference 2012 (Goettingen): New Approaches and Challenges for the Labor Market of the 21st Century 62052, Verein für Socialpolitik / German Economic Association.
  2. Wolfgang Lechthaler & Christian Merkl & Dennis Snower, 2008. "Monetary Persistence and the Labor Market: A New Perspective," Kiel Working Papers 1409, Kiel Institute for the World Economy.
  3. Mirko Abbritti & Andreas I. Mueller, 2013. "Asymmetric Labor Market Institutions in the EMU and the Volatility of Inflation and Unemployment Differentials," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 45(6), pages 1165-1186, 09.
  4. Schwarzmüller, Tim & Stähler, Nikolai, 2011. "Reforming the labor market and improving competitiveness: An analysis for Spain using FiMod," Discussion Paper Series 1: Economic Studies 2011,28, Deutsche Bundesbank, Research Centre.
  5. Regis Barnichon, 2009. "Demand-driven job separation: reconciling search models with the ins and outs of unemployment," Finance and Economics Discussion Series 2009-24, Board of Governors of the Federal Reserve System (U.S.).
  6. Stefano Gnocchi & Evi Pappa, 2009. "Do labor market rigidities matter for business cycles? Yes they do," Working Papers 411, Barcelona Graduate School of Economics.
  7. Matteo Cacciatore, 2012. "International Trade and Macroeconomic Dynamics with Labor Market Frictions," 2012 Meeting Papers 875, Society for Economic Dynamics.
  8. Poilly, Céline & Wesselbaum, Dennis, 2014. "Evaluating labor market reforms: A normative analysis," Journal of Macroeconomics, Elsevier, vol. 39(PA), pages 156-170.

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