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Employment, hours and optimal monetary policy

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  • Dossche, Maarten
  • Lewis, Vivien
  • Poilly, Céline

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

  • Dossche, Maarten & Lewis, Vivien & Poilly, Céline, 2015. "Employment, hours and optimal monetary policy," Discussion Papers 01/2015, Deutsche Bundesbank.
    • Handle: RePEc:zbw:bubdps:012015
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    References listed on IDEAS

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    Cited by:

    1. Pierrick Clerc, 2021. "The Dynamics of Unemployment and Inflation in New Keynesian Models with Two Labor Margins," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 53(2-3), pages 301-332, March.
    2. Andrew T. Foerster & José Mustre‐Del‐Río, 2022. "Search with Wage Posting under Sticky Prices," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 54(2-3), pages 599-626, March.

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    More about this item

    Keywords

    employment; hours; wage curve; optimal monetary policy;
    All these keywords.

    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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