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Monetary persistence and the labor market: A new perspective

Wolfgang Lechthaler, Christian Merkl () and Dennis J. Snower

No 1409, Kiel Working Papers from Kiel Institute for the World Economy (IfW)

Abstract: It is common knowledge that the standard New Keynesian model is not able to generate a persistent response in output to temporary monetary shocks. We show that this shortcoming can be remedied in a simple and intuitively appealing way through the introduction of labor turnover costs (such as hiring and firing costs). Assuming that it is costly to hire and fire workers implies that the employment rate is slow to converge to its steady state value after a monetary shock. Under reasonable calibrations, the after-effects of a shock continue to exert an effect on the labor market even long after the shock is over. The sluggishness of the labor market translates to the product market and thus the output effects of the monetary shock become more persistent. Our model is able to generate a hump-shaped response in output if the monetary shock includes a moderate autoregressive component. This is another empirically well known feature which the standard model is not able to replicate.

Keywords: Labor Market; Hiring and Firing Costs; Monetary Persistence (search for similar items in EconPapers)
JEL-codes: E52 E24 E32 J23 (search for similar items in EconPapers)
Date: 2008
References: View references in EconPapers View complete reference list from CitEc
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Related works:
Journal Article: Monetary persistence and the labor market: A new perspective (2010) Downloads
Working Paper: Monetary Persistence and the Labor Market: A New Perspective (2010) Downloads
Working Paper: Monetary Persistence and the Labor Market: A New Perspective (2010) Downloads
Working Paper: Monetary Persistence and the Labor Market: A New Perspective (2008) Downloads
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