Journal Article

Quadratic Labor Adjustment Costs, Business Cycle Dynamics and Optimal Monetary Policy

Macroeconomic Dynamics

We build quadratic labor adjustment costs into an otherwise standard

New-Keynesian model of the business cycle and show that this increases

output persistence in a similar vein as other models of labor market

frictions.

Furthermore, we demonstrate the implication of quadratic labor adjustment costs for monetary policy. We show that there is a simple rule determining whether quadratic labor adjustment costs imply a trade-off between stabilizing inflation and output.

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Publication Date
JEL Classification
E24, E32, E52, J23