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Labor Market Shocks and Monetary Policy

Serdar Birinci (), Fatih Karahan (), Yusuf Mercan and Kurt See ()

No 2022-016, Working Papers from Federal Reserve Bank of St. Louis

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 the 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: job mobility; monetary policy; heterogenous agent New Keynesian (HANK); job search (search for similar items in EconPapers)
JEL-codes: E12 E24 E52 J31 J62 J64 (search for similar items in EconPapers)
Pages: 70 pages
Date: 2022-08, Revised 2023-09
New Economics Papers: this item is included in nep-cba, nep-dge, nep-lab and nep-mon
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DOI: 10.20955/wp.2022.016

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