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
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Bibliographic Information
Provider: Federal Reserve Bank of St. Louis
Part of Series: Working Papers
Publication Date: 2023-09
Number: 2022-016
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- Working Paper Revision: Labor Market Shocks and Monetary Policy