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 with a frictional labor market and on-the-job search to study how employer-to-employer (EE) transitions affect macroeconomic outcomes and monetary policy. We find that EE dynamics significantly shaped inflation during the Great Recession and COVID-19 recoveries. Despite similar unemployment paths, the former experienced weaker EE transitions and lower inflation. Optimal monetary policy prescribes a strong positive response to EE fluctuations, implying central banks should distinguish between episodes with similar unemployment but different EE patterns. We show that accounting for market incompleteness alters macroeconomic outcomes and optimal monetary policy prescriptions upon changes in EE transitions.

Keywords: job mobility; monetary policy; heterogeneous agent New Keynesian (HANK) models; job search (search for similar items in EconPapers)
JEL-codes: E12 E24 E52 J31 J62 J64 (search for similar items in EconPapers)
Pages: 68 pages
Date: 2022-08, Revised 2025-11-17
New Economics Papers: this item is included in nep-cba, nep-dge, nep-lab and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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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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DOI: 10.20955/wp.2022.016

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