Working Paper

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

Authors

  • Wolfgang Lechthaler
  • Dennis J. Snower
Publication Date

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, it is demonstrated that quadratic labor adjustment costs imply a trade off between stabilizing output and stabilizing inflation.

Kiel Institute Expert

Info

JEL Classification
E24, E32, E52, J23

Key Words

  • Labor Adjustment Costs
  • Monetary Persistence
  • Optimal Monetary Policy