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The role of labor markets for Euro area monetary policy

Kai Christoffel, Keith Kuester and Tobias Linzert

No 09-1, Working Papers from Federal Reserve Bank of Philadelphia

Abstract: In this paper, we explore the role of labor markets for monetary policy in the euro area in a New Keynesian model in which labor markets are characterized by search and matching frictions.> We first investigate to which extent a more flexible labor market would alter the business cycle behavior and the transmission of monetary policy. We find that while a lower degree of wage rigidity makes monetary policy more effective, i.e. a monetary policy shock transmits faster onto inflation, the importance of other labor market rigidities for the transmission of shocks is rather limited. Second, having estimated the model by Bayesian techniques we analyze to which extent labor market shocks, such as disturbances in the vacancy posting process, shocks to the separation rate and variations in bargaining power are important determinants of business cycle fluctuations. Our results point primarily towards disturbances in the bargaining process as a significant contributor to inflation and output fluctuations. In sum, the paper supports current central bank practice which appears to put considerable effort into monitoring euro area wage dynamics and which appears to treat some of the other labor market information as less important for monetary policy.

Keywords: Labor market - Europe; European Union countries; Monetary policy - Europe (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-eec, nep-lab, nep-mac and nep-mon
Date: 2009
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Journal Article: The role of labor markets for euro area monetary policy (2009) Downloads
Working Paper: The role of labor markets for euro area monetary policy (2009) Downloads
Working Paper: The role of labor markets for euro area monetary policy (2009) Downloads
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