Monetary Persistence and the Labor Market: A New Perspective

29 Pages Posted: 5 Jun 2008

See all articles by Wolfgang Lechthaler

Wolfgang Lechthaler

Institute for the World Economy

Christian Merkl

University of Erlangen-Nuremberg-Friedrich Alexander Universität Erlangen Nürnberg; IZA Institute of Labor Economics

Dennis J. Snower

University of Kiel - Institute for World Economics (IfW); Institute for the Study of Labor (IZA); Centre for Economic Policy Research (CEPR); CESifo (Center for Economic Studies and Ifo Institute)

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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. 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. Under reasonable calibrations our model generates hump-shaped output responses. In addition, it is able to replicate the Beveridge curve relationship and a negative correlation between job creation and job destruction.

Keywords: monetary persistence, labor market, hiring and firing costs

JEL Classification: E24, E32, E52, J23

Suggested Citation

Lechthaler, Wolfgang and Merkl, Christian and Snower, Dennis J., Monetary Persistence and the Labor Market: A New Perspective. IZA Discussion Paper No. 3513, Available at SSRN: https://ssrn.com/abstract=1139903 or http://dx.doi.org/10.2139/ssrn.1139903

Wolfgang Lechthaler (Contact Author)

Institute for the World Economy ( email )

Düsternbrooker Weg 120
Kiel, D-24105
Germany

HOME PAGE: http://www.ifw-kiel.de/kiel-institute-for-the-world-economy/view?set_language=en

Christian Merkl

University of Erlangen-Nuremberg-Friedrich Alexander Universität Erlangen Nürnberg

Schloßplatz 4
Erlangen, DE Bavaria 91054
Germany

IZA Institute of Labor Economics ( email )

P.O. Box 7240
Bonn, D-53072
Germany

Dennis J. Snower

University of Kiel - Institute for World Economics (IfW) ( email )

Duesternbrooker Weg 120
D-24118 Kiel
Germany
+49+431-8814-235 (Phone)

Institute for the Study of Labor (IZA)

P.O. Box 7240
Bonn, D-53072
Germany

Centre for Economic Policy Research (CEPR)

London
United Kingdom

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

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