Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/4246
Authors: 
Lechthaler, Wolfgang
Merkl, Christian
Snower, Dennis J.
Year of Publication: 
2008
Series/Report no.: 
Kieler Arbeitspapiere 1409
Abstract: 
It is common knowledge that the standard New Keynesian model is not able to generate a persistent response in output to temporary monetary shocks. We show that this shortcoming can be remedied in a simple and intuitively appealing way through the introduction of labor turnover costs (such as hiring and firing costs). Assuming that it is costly to hire and fire workers implies that the employment rate is slow to converge to its steady state value after a monetary shock. Under reasonable calibrations, the after-effects of a shock continue to exert an effect on the labor market even long after the shock is over. The sluggishness of the labor market translates to the product market and thus the output effects of the monetary shock become more persistent. Our model is able to generate a hump-shaped response in output if the monetary shock includes a moderate autoregressive component. This is another empirically well known feature which the standard model is not able to replicate.
Subjects: 
Monetary Persistence
Labor Market
Hiring and Firing Costs
JEL: 
E52
E24
E32
J23
Document Type: 
Working Paper

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