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Monetary Policy and Labor Market Institutions

Author

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  • Ester Faia
  • Christian Haefke

Abstract

In this paper we study how differences in labor market institutions affect the impact of monetary policy on real activity for the U.S. and European countries. We model real shocks as changes in the separation rate of worker-firm matches which can be thought of as a labor demand shock. In expansionary periods (of low separation) output and wages increase which exerts upward pressure on prices. To counteract inflationary tendencies the central bank raises the interest rate which affects the present value of future job-matches and thus reduces posted vacancies, employment and output. Thus we obtain an equilibrium relationship between inflation and unemployment. Institutions interact with shocks which gives rise to substantially different responses for alternative settings of labor market institutions. We calibrate the model to data for the U.S. and several European economies and explicitly consider the role of unemployment benefits as our measure for labor market institutions

Suggested Citation

  • Ester Faia & Christian Haefke, 2004. "Monetary Policy and Labor Market Institutions," Econometric Society 2004 North American Winter Meetings 298, Econometric Society.
    • Handle: RePEc:ecm:nawm04:298
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    More about this item

    Keywords

    Phillips Curve; Labor Demand Shocks; Mortensen-Pissarides matching model;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity

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