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Title:Labor turnover costs, workers' heterogeneity and optimal monetary policy PDF Logo
Authors:Faia, Ester
Lechthaler, Wolfgang
Merkl, Christian
Issue Date:2009
Citation:[Series:] Kiel working paper [No.:] 1534 [Editor:] Kiel Inst. for the World Economy, Kiel
Series/Report no.:Kiel working paper 1534
Abstract:We study the design of optimal monetary policy in a New Keynesian model with labor turnover costs in which wages are set according to a right to manage bargaining where the firms' counterpart is given by currently employed workers. Our model captures well the salient features of European labor market, as it leads to sclerotic dynamics of worker flows. The coexistence of those types of labor market frictions alongside with sticky prices gives rise to a non-trivial trade-off for the monetary authority. In this framework, firms and current employees extract rents and the policy maker finds it optimal to use state contingent inflation taxes/subsidies to smooth those rents. Hence, in the optimal Ramsey plan, inflation deviates from zero and the optimal volatility of inflation is an increasing function of firing costs. The optimal rule should react to employment alongside inflation.
Subjects:Optimal monetary policy
hiring and firing costs
labor market frictions
policy trade-off
JEL:E52
E24
Document Type:Working Paper
Appears in Collections:Kieler Arbeitspapiere, IfW
Publikationen von Forscherinnen und Forschern des IfW

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