Employment, Hours and Optimal Monetary Policy

46 Pages Posted: 21 Jun 2016

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: 2015


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 a 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 (2015). Bundesbank Discussion Paper No. 01/2015. Available at SSRN: https://ssrn.com/abstract=2797019

Maarten Dossche (Contact Author)

National Bank of Belgium ( email )

Brussels, B-1000

Vivien Lewis

Research Centre ( email )

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

KU Leuven ( email )

Oude Markt 13
Leuven, 3000

Céline Poilly

University of Lausanne ( email )

Quartier Chambronne

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