Labor Market Shocks and Monetary Policy

Serdar Birinci, Fatih Karahan, Yusuf Mercan and Kurt See

Staff Working Papers from Bank of Canada

Abstract: We develop a heterogeneous-agent New Keynesian model featuring a frictional labor market with on-the-job search to quantitatively study the positive and normative implications of employer-to-employer (EE) transitions for inflation. We find that EE dynamics played an important role in shaping the differential inflation dynamics observed during the Great Recession and COVID-19 recoveries, with the former exhibiting subdued EE transitions and inflation despite both episodes sharing similar unemployment dynamics. The optimal monetary policy prescribes a strong positive response to EE fluctuations, implying that central banks should distinguish between recovery episodes with similar unemployment but different EE dynamics.

Keywords: Business fluctuations and cycles; Inflation and prices; Labour markets; Monetary policy (search for similar items in EconPapers)
JEL-codes: E12 E24 E52 J31 J64 (search for similar items in EconPapers)
Pages: 73 pages
Date: 2023-10
New Economics Papers: this item is included in nep-ban, nep-dge, nep-lab, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
https://www.bankofcanada.ca/wp-content/uploads/2023/10/swp2023-52.pdf Full text (application/pdf)

Related works:
Working Paper: Labor Market Shocks and Monetary Policy (2024)
Working Paper: Labor Market Shocks and Monetary Policy (2024)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bca:bocawp:23-52

Access Statistics for this paper

More papers in Staff Working Papers from Bank of Canada 234 Wellington Street, Ottawa, Ontario, K1A 0G9, Canada. Contact information at EDIRC.
Bibliographic data for series maintained by ().