QUADRATIC LABOR ADJUSTMENT COSTS, BUSINESS CYCLE DYNAMICS, AND OPTIMAL MONETARY POLICY

Wolfgang Lechthaler and Dennis J. Snower

Macroeconomic Dynamics, 2013, vol. 17, issue 2, 464-475

Abstract: We build quadratic labor adjustment costs into an otherwise standard New Keynesian model of the business cycle and show that this increases output persistence in a vein similar to that of other models of labor market frictions. Furthermore, we demonstrate the implication of quadratic labor adjustment costs for monetary policy. We show that there is a simple rule determining whether quadratic labor adjustment costs imply a trade-off between stabilizing inflation and output.

Date: 2013
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