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Labor mobility in a monetary union

Author

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  • Hauser, Daniela

    () (Bank of Canada)

  • Seneca, Martin

    () (Bank of England)

Abstract

We study macroeconomic dynamics and optimal monetary policy in an economy with cyclical labor flows across two distinct regions sharing trade links and a common monetary framework. In our New Keynesian DSGE model with search and matching frictions, migration flows are driven by fluctuations in the relative labor market performance across the monetary union. The optimizing monetary policymaker shows greater flexibility in inflation targeting when labor is mobile by leaning somewhat against deviations of migration flows from efficient benchmarks. But strict inflation targeting remains close to optimal. For a given monetary policy, labor mobility facilitates macroeconomic adjustments by reducing efficiency gaps in regional labor markets. Internal migration therefore reduces the welfare costs of following simple suboptimal monetary policy rules in a monetary union.

Suggested Citation

  • Hauser, Daniela & Seneca, Martin, 2019. "Labor mobility in a monetary union," Bank of England working papers 786, Bank of England.
  • Handle: RePEc:boe:boeewp:0786
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    References listed on IDEAS

    as
    1. Campolmi, Alessia & Gnocchi, Stefano, 2016. "Labor market participation, unemployment and monetary policy," Journal of Monetary Economics, Elsevier, vol. 79(C), pages 17-29.
    2. Emmanuel Farhi & Ivan Werning, 2014. "Labor Mobility Within Currency Unions," Working Paper 165206, Harvard University OpenScholar.
    3. Frank Smets & Rafael Wouters, 2007. "Shocks and Frictions in US Business Cycles: A Bayesian DSGE Approach," American Economic Review, American Economic Association, vol. 97(3), pages 586-606, June.
    4. Guilherme Bandeira & Jordi Caballé & Eugenia Vella, 2018. "Should I stay or should I go? Austerity, unemployment and migration," Working Papers 1839, Banco de España;Working Papers Homepage.
    5. Christopher J. Flinn, 2006. "Minimum Wage Effects on Labor Market Outcomes under Search, Matching, and Endogenous Contact Rates," Econometrica, Econometric Society, vol. 74(4), pages 1013-1062, July.
    6. Daniela Hauser, 2014. "Technology Shocks, Labour Mobility and Aggregate Fluctuations," Staff Working Papers 14-4, Bank of Canada.
    7. Carl Walsh, 2014. "Multiple Objectives and Central Bank Tradeoffs under Flexible Inflation Targeting," CESifo Working Paper Series 5097, CESifo.
    8. Pappa, Evi, 2004. "Do the ECB and the fed really need to cooperate? Optimal monetary policy in a two-country world," Journal of Monetary Economics, Elsevier, vol. 51(4), pages 753-779, May.
    9. Bruce C. Greenwald & Joseph E. Stiglitz, 1986. "Externalities in Economies with Imperfect Information and Incomplete Markets," The Quarterly Journal of Economics, Oxford University Press, vol. 101(2), pages 229-264.
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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Labor Mobility in a Monetary Union
      by Christian Zimmermann in NEP-DGE blog on 2019-04-27 12:48:16

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    Cited by:

    1. Francesco Furlanetto & Orjan Robstad, 2019. "Immigration and the macroeconomy: some new empirical evidence," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 34, pages 1-19, October.
    2. Christopher L. House & Christian Proebsting & Linda L. Tesar, 2018. "Quantifying the Benefits of Labor Mobility in a Currency Union," Working Papers 671, Research Seminar in International Economics, University of Michigan.
    3. Francesco Furlanetto & Orjan Robstad, 2019. "Immigration and the macroeconomy: some new empirical evidence," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 34, pages 1-19, October.

    More about this item

    Keywords

    Labor mobility; monetary policy; monetary union; business cycles;

    JEL classification:

    • 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
    • F45 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Macroeconomic Issues of Monetary Unions

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