Labor market reform and price stability: An application to the Euro Area

Carlos Thomas and Francesco Zanetti

Journal of Monetary Economics, 2009, vol. 56, issue 6, 885-899

Abstract: Central bankers frequently suggest that labor market reform may be beneficial for inflation management. This paper investigates this topic by simulating the effects of reductions in firing costs and unemployment benefits on inflation volatility in the Euro Area, using an estimated New Keynesian model with search and matching frictions. Qualitatively, changes in labor market policies alter the volatility of inflation in response to shocks, by affecting the volatility of the three components of real marginal costs (hiring costs, firing costs and wage costs). Quantitatively, we find, however, that neither policy is likely to have an important effect on inflation volatility, due to the small contribution of hiring and firing costs to inflation dynamics.

Keywords: Labor; market; policies; Search; and; matching; frictions; New; Keynesian; model (search for similar items in EconPapers)
Date: 2009
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (105)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:moneco:v:56:y:2009:i:6:p:885-899

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