Working Paper

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


  • Lechthaler
  • W.
  • Snower
  • D.J.
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


JEL Classification
E24, E32, E52, J23

Key Words

  • Labor Adjustment Costs
  • Monetary Persistence
  • Optimal Monetary Policy