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What is the role of higher wage flexibility of new hires for optimal monetary policy?

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  • Nikolay Ushakov

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    (National Research University Higher School of Economics)

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    Abstract

    Higher wage flexibility of new hires is introduced as an extension of the baseline model in Gali (2010), combining the New Keynesian monetary analysis framework with labor market frictions. It was shown that the possibility of higher wage flexibility of new hires has an implication forcrucial labor market decisions made by households and firms,as well as on the form of social welfare loss function that is used to evaluate alternative monetary policies. Obtained extension allows one to conduct normative monetary policy analysis for different scenarios of degrees of higher wage flexibility fornew hires. Optimal monetary policy in the presence of higher wage flexibility of new hires is characterized by a higher incentive to make inflation more stable and by less incentive to facilitate adjustment of real wages in response to real shocks. Thus, the possibility of higher wage flexibility of new hires provides support toward more strict inflation targeting in the presence of nominal price and wage rigidities

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    Bibliographic Info

    Paper provided by National Research University Higher School of Economics in its series HSE Working papers with number WP BRP 44/EC/2013.

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    Length: 40 pages
    Date of creation: 2013
    Date of revision:
    Publication status: Published in WP BRP Series: Economics / EC, December 2013, pages 1-40
    Handle: RePEc:hig:wpaper:44/ec/2013

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    Keywords: Relative wage flexibility of new hires; optimal monetary policy; New Keynesian framework; search and matching in the labor market; unemployment;

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    1. Alan B. Krueger & Andreas I. Mueller, 2012. "The Lot Of The Unemployed: A Time Use Perspective," Journal of the European Economic Association, European Economic Association, vol. 10(4), pages 765-794, 08.
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    7. Olivier Blanchard & Jordi Gali, 2008. "Labor Markets and Monetary Policy: A New-Keynesian Model with Unemployment," NBER Working Papers 13897, National Bureau of Economic Research, Inc.
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