Labor Mobility in a Monetary Union

100 Pages Posted: 12 Apr 2019

See all articles by Daniela Hauser

Daniela Hauser

Government of Canada - Bank of Canada

Martin Seneca

Bank of England

Date Written: April 12, 2019

Abstract

We study macroeconomic dynamics and optimal monetary policy in an economy with cyclical labor flows across two distinct regions sharing trade links and a common monetary framework. In our New Keynesian DSGE model with search and matching frictions, migration flows are driven by fluctuations in the relative labor market performance across the monetary union. The optimizing monetary policymaker shows greater flexibility in inflation targeting when labor is mobile by leaning somewhat against deviations of migration flows from efficient benchmarks. But strict inflation targeting remains close to optimal. For a given monetary policy, labor mobility facilitates macroeconomic adjustments by reducing efficiency gaps in regional labor markets. Internal migration therefore reduces the welfare costs of following simple suboptimal monetary policy rules in a monetary union.

Keywords: labor mobility, monetary policy, monetary union, business cycles

JEL Classification: E32, E52, F45

Suggested Citation

Hauser, Daniela and Seneca, Martin, Labor Mobility in a Monetary Union (April 12, 2019). Bank of England Working Paper No. 786 (2019), Available at SSRN: https://ssrn.com/abstract=3370985 or http://dx.doi.org/10.2139/ssrn.3370985

Daniela Hauser

Government of Canada - Bank of Canada ( email )

234 Wellington Street
Ontario, Ottawa K1A 0G9
Canada

Martin Seneca (Contact Author)

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

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