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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
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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. Lechthaler, Wolfgang & Merkl, Christian & Snower, Dennis J., 2008. "Monetary Persistence and the Labor Market: A New Perspective," IZA Discussion Papers 3513, Institute for the Study of Labor (IZA).
  2. Federico Di Pace & Matthias S. Hertweck, 2012. "Labour Market Frictions, Monetary Policy and Durable Goods," Working Paper Series of the Department of Economics, University of Konstanz 2012-09, Department of Economics, University of Konstanz.
  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. 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.).
  5. Matteo Cacciatore, 2012. "International Trade and Macroeconomic Dynamics with Labor Market Frictions," 2012 Meeting Papers 875, Society for Economic Dynamics.
  6. Poilly, Céline & Wesselbaum, Dennis, 2014. "Evaluating labor market reforms: A normative analysis," Journal of Macroeconomics, Elsevier, vol. 39(PA), pages 156-170.
  7. Stefano Gnocchi & Evi Pappa, 2009. "Do labor market rigidities matter for business cycles? Yes they do," Working Papers 411, Barcelona Graduate School of Economics.
  8. Tim Schwarzmüller & Nikolai Stähler, 2013. "Reforming the labor market and improving competitiveness: an analysis for Spain using FiMod," SERIEs, Spanish Economic Association, vol. 4(4), pages 437-471, November.

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