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Employment, hours and optimal monetary policy

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  • Maarten DOSSCHE
  • Vivien LEWIS
  • Céline POILLY

Abstract

We characterize optimal monetary policy in a New Keynesian search-and-matching model where multiple-worker firms satisfy demand in the short run by adjusting hours per worker. Imperfect product market competition and search frictions reduce steady state hours per worker below the efficient level. Bargaining results in a convex wage curve’ linking wages to hours. Since the steady-state real marginal wage is low, wages respond little to hours. As a result, firms overuse the hours margin at the expense of hiring, which makes hours too volatile. The Ramsey planner uses inflation as a instrument to dampen inefficient hours fluctuations.

Suggested Citation

  • Maarten DOSSCHE & Vivien LEWIS & Céline POILLY, 2014. "Employment, hours and optimal monetary policy," Working Papers Department of Economics ces14.16, KU Leuven, Faculty of Economics and Business, Department of Economics.
  • Handle: RePEc:ete:ceswps:ces14.16
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    References listed on IDEAS

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    Cited by:

    1. Foerster, Andrew T. & Mustre-del-Rio, Jose, 2014. "Search with wage posting under sticky prices," Research Working Paper RWP 14-17, Federal Reserve Bank of Kansas City.

    More about this item

    JEL classification:

    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General

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