Labor Market Shocks and Monetary Policy

RePEc Short ID: pbi318
ORCID iD: 0000-0001-7323-1932

Birinci, Serdar; Karahan, Fatih; Mercan, Yusuf; See, Kurt

doi:10.20955/wp.2022.016

Working Paper Revision

Labor Market Shocks and Monetary Policy

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;

JEL Classification: E12; E24; E52; J31; J62; J64;

https://doi.org/10.20955/wp.2022.016