Journal Article

Labor Selection, Turnover Costs and Optimal Monetary Policy

Authors

  • Wolfgang Lechthaler
  • Christian Merkl
  • Ester Faia
Publication Date

We study optimal monetary policy and welfare properties of a DSGE model with a labor selection process, labor turnover costs and Nash bargained wages. We show that our model implies ineffciencies which cannot be offset in a standard wage bargaining regime. We also show that the inefficiencies rise with the magnitude of firing costs. As a result, in the optimal Ramsey plan, the optimal inflation volatility deviates from zero and is an increasing function of firing costs.

Info

JEL Classification
E52, E24

Key Words

  • hiring and firing costs
  • labor market frictions
  • Optimal Monetary Policy
  • policy trade-off