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Labor mobility in a monetary union

Daniela Hauser () and Martin Seneca

No 786, Bank of England working papers from Bank of England

Abstract: We study macroeconomic dynamics and optimal monetary policy in an economy with cyclical labor flows across two distinct regions sharing trade links and a common monetary framework. In our New Keynesian DSGE model with search and matching frictions, migration flows are driven by fluctuations in the relative labor market performance across the monetary union. The optimizing monetary policymaker shows greater flexibility in inflation targeting when labor is mobile by leaning somewhat against deviations of migration flows from efficient benchmarks. But strict inflation targeting remains close to optimal. For a given monetary policy, labor mobility facilitates macroeconomic adjustments by reducing efficiency gaps in regional labor markets. Internal migration therefore reduces the welfare costs of following simple suboptimal monetary policy rules in a monetary union.

Keywords: Labor mobility; monetary policy; monetary union; business cycles (search for similar items in EconPapers)
JEL-codes: E32 E52 F45 (search for similar items in EconPapers)
Pages: 100 pages
Date: 2019-04-12
New Economics Papers: this item is included in nep-mac, nep-mig and nep-opm
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Working Paper: Labor Mobility in a Monetary Union (2019) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:boe:boeewp:0786

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