Labor Market Shocks and Monetary Policy

We study the positive and normative implications for inflation of employer-to-employer (EE) worker transitions by developing a heterogeneous agent New Keynesian model featuring a frictional labor market with on-the-job search. We find that EE dynamics played an important role in shaping the differen...

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Bibliographic Details
Published in:Policy File 2024
Main Authors: Birinci, Serdar, Karahan, Fatih, Mercan, Yusuf, See, Kurt
Format: Report
Language:English
Subjects:
Economic policy
Employment
Keynesian theory
Labor market
Monetary policy
Online Access:Request full text
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Summary:We study the positive and normative implications for inflation of employer-to-employer (EE) worker transitions by developing a heterogeneous agent New Keynesian model featuring a frictional labor market with on-the-job search. We find that EE dynamics played an important role in shaping the differential inflation dynamics observed during the Great Recession and COVID-19 recoveries. Despite both recoveries sharing similar unemployment dynamics, the recovery from the Great Recession exhibited subdued EE transitions and inflation dynamics. In our model, the optimal monetary policy involves a strong positive response to EE fluctuations, suggesting that central banks should distinguish between recovery episodes with different EE dynamics even if they have similar unemployment rates.