Monetary Persistence and the Labor Market: A New Perspective
Abstract
It is common knowledge that the standard New Keynesian model is not able to generate a persistent response in output to temporary monetary shocks. We show that this shortcoming can be remedied in a simple and intuitively appealing way through the introduction of labor turnover costs (such as hiring and firing costs). Assuming that it is costly to hire and fire workers implies that the employment rate is slow to converge to its steady state value after a monetary shock. The after-effects of a shock continue to exert an effect on the labor market even long after the shock is over. The sluggishness of the labor market translates to the product market and thus the output effects of the monetary shock become more persistent. Under reasonable calibrations our model generates hump-shaped output responses. In addition, it is able to replicate the Beveridge curve relationship and a negative correlation between job creation and job destruction.Download Info
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Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 3513.Length: 29 pages
Date of creation: May 2008
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Handle: RePEc:iza:izadps:dp3513
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Keywords: hiring and firing costs; labor market; monetary persistence;Other versions of this item:
- Lechthaler, Wolfgang & Merkl, Christian & Snower, Dennis J., 2010. "Monetary persistence and the labor market: A new perspective," Journal of Economic Dynamics and Control, Elsevier, vol. 34(5), pages 968-983, May.
- Lechthaler, Wolfgang & Merkl, Christian & Snower, Dennis J., 2010. "Monetary Persistence and the Labor Market: A New Perspective," CEPR Discussion Papers 7650, C.E.P.R. Discussion Papers.
- 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.
- Wolfgang Lechthaler & Christian Merkl & Dennis Snower, 2010. "Monetary Persistence and the Labor Market: A New Perspective," CESifo Working Paper Series 2935, CESifo Group Munich.
- E24 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution
- E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
- J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-07-14 (All new papers)
- NEP-CBA-2008-07-14 (Central Banking)
- NEP-LAB-2008-07-14 (Labour Economics)
- NEP-MAC-2008-07-14 (Macroeconomics)
- NEP-MON-2008-07-14 (Monetary Economics)
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