Employment, Hours and Optimal Monetary Policy

67 Pages Posted: 12 Aug 2014

See all articles by Maarten Dossche

Maarten Dossche

National Bank of Belgium

Vivien Lewis

Research Centre; KU Leuven

Céline Poilly

University of Lausanne

Multiple version iconThere are 4 versions of this paper

Date Written: July 31, 2014

Abstract

We characterize optimal monetary policy in a New Keynesian search-and-matching model where multiple-worker firms satisfy demand in the short run by adjusting hours per worker. Imperfect product market competition and search frictions reduce steady state hours per worker below the efficient level. Bargaining results in a convex 'wage curve' linking wages to hours. Since the steady-state real marginal wage is low, wages respond little to hours. As a result, firms overuse the hours margin at the expense of hiring, which makes hours too volatile. The Ramsey planner uses inflation as an instrument to dampen inefficient hours fluctuations.

Keywords: employment, hours, wage curve, optimal monetary policy

JEL Classification: E30, E50, E60

Suggested Citation

Dossche, Maarten and Lewis, Vivien and Poilly, Céline, Employment, Hours and Optimal Monetary Policy (July 31, 2014). ECB Working Paper No. 1713. Available at SSRN: https://ssrn.com/abstract=2474680

Maarten Dossche

National Bank of Belgium ( email )

Brussels, B-1000
Belgium

Vivien Lewis

Research Centre ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

KU Leuven ( email )

Oude Markt 13
Leuven, 3000
Belgium

Céline Poilly (Contact Author)

University of Lausanne ( email )

Quartier Chambronne
Vaud

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