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

Willem Van Zandweghe ()

No RWP 09-03, Research Working Paper from Federal Reserve Bank of Kansas City

Abstract: 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.

New Economics Papers: this item is included in nep-cba, nep-dge, nep-lab and nep-mac
Date: 2009
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