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Labor mobility in a monetary union

Author

Listed:
  • 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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    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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