Monetary Persistence and the Labor Market: A New Perspective

Wolfgang Lechthaler, Christian Merkl and Dennis Snower

No 3513, IZA Discussion Papers from Institute of Labor Economics (IZA)

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. 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. Under reasonable calibrations our model generates hump-shaped output responses. In addition, it is able to replicate the Beveridge curve relationship and a negative correlation between job creation and job destruction.

Keywords: hiring and firing costs; labor market; monetary persistence (search for similar items in EconPapers)
JEL-codes: E24 E32 E52 J23 (search for similar items in EconPapers)
Pages: 29 pages
Date: 2008-05
New Economics Papers: this item is included in nep-cba, nep-lab, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (47)

Published - substantially revised version published in: Journal of Economic Dynamics and Control, 2010, 34 (5), 968-983

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Related works:
Journal Article: Monetary persistence and the labor market: A new perspective (2010)
Working Paper: Monetary Persistence and the Labor Market: A New Perspective (2010)
Working Paper: Monetary Persistence and the Labor Market: A New Perspective (2010)
Working Paper: Monetary persistence and the labor market: A new perspective (2008)
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