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Employment, hours and optimal monetary policy

Listed author(s):
  • Maarten DOSSCHE
  • Vivien LEWIS
  • Céline POILLY

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.

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File URL: https://lirias.kuleuven.be/bitstream/123456789/457117/1/DPS1416.pdf
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Paper provided by KU Leuven, Faculty of Economics and Business, Department of Economics in its series Working Papers Department of Economics with number ces14.16.

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Date of creation: Jun 2014
Handle: RePEc:ete:ceswps:ces14.16
Contact details of provider: Web page: http://feb.kuleuven.be/Economics/

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