Labor Market Shocks and Monetary Policy

Serdar Birinci, Fatih Karahan, Yusuf Mercan and Kurt See

No RWP 24-04, Research Working Paper from Federal Reserve Bank of Kansas City

Abstract: We study the positive and normative implications for inflation of employer-to-employer (EE) worker transitions by developing a heterogeneous agent New Keynesian model featuring a frictional labor market with on-the-job search. We find that EE dynamics played an important role in shaping the differential inflation dynamics observed during the Great Recession and COVID-19 recoveries. Despite both recoveries sharing similar unemployment dynamics, the recovery from the Great Recession exhibited subdued EE transitions and inflation dynamics. In our model, the optimal monetary policy involves a strong positive response to EE fluctuations, suggesting that central banks should distinguish between recovery episodes with different EE dynamics even if they have similar unemployment rates.

Keywords: job mobility; monetary policy; HANK model; job search (search for similar items in EconPapers)
JEL-codes: E12 E24 E52 J31 J62 J64 (search for similar items in EconPapers)
Pages: 74
Date: 2024-05-06
New Economics Papers: this item is included in nep-dge, nep-lab and nep-mon
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Related works:
Working Paper: Labor Market Shocks and Monetary Policy (2024)
Working Paper: Labor Market Shocks and Monetary Policy (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedkrw:98509

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DOI: 10.18651/RWP2024-04

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