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On-the-job search, sticky prices, and persistence

  • Willem Van Zandweghe

Models of the monetary transmission mechanism often generate empirically implausible business fluctuations. This paper analyzes the role of on-the-job search in the propagation of monetary shocks in a sticky price model with labor market search frictions. Such frictions induce long-term employment relationships, such that the real marginal cost is determined by real wages and the cost of an employment relationship. On-the-job search opens up an extra channel of employment growth that dampens the response of these two components. Because real marginal cost rigidity induces small price adjustments, on-the-job search gives rise to a strong propagation of monetary shocks that increases output persistence.

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Paper provided by Federal Reserve Bank of Kansas City in its series Research Working Paper with number RWP 09-03.

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Date of creation: 2009
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Handle: RePEc:fip:fedkrw:rwp09-03
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