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

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  • Thomas, Carlos
  • Zanetti, Francesco

Abstract

Central bankers frequently suggest that labor market reform may be beneficial for inflation management. This paper investigates this topic by simulating the effects of reductions in firing costs and unemployment benefits on inflation volatility in the Euro Area, using an estimated New Keynesian model with search and matching frictions. 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 contribution of hiring and firing costs to inflation dynamics.

Suggested Citation

  • Thomas, Carlos & Zanetti, Francesco, 2009. "Labor market reform and price stability: An application to the Euro Area," Journal of Monetary Economics, Elsevier, vol. 56(6), pages 885-899, September.
  • Handle: RePEc:eee:moneco:v:56:y:2009:i:6:p:885-899
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    More about this item

    Keywords

    Labor market policies Search and matching frictions New Keynesian model;

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search

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