Arbeitspapier

The role of labor markets for euro area monetary policy

In this paper, we explore the role of labor markets for monetary policy in the euro area in a New Keynesian model in which labor markets are characterized by search and matching frictions. We first investigate to which extent a more flexible labor market would alter the business cycle behavior and the transmission of monetary policy. We find that while a lower degree of wage rigidity makes monetary policy more effective, i.e. a monetary policy shock transmits faster onto inflation, the importance of other labor market rigidities for the transmission of shocks is rather limited. Second, having estimated the model by Bayesian techniques we analyze to which extent labor market shocks, such as disturbances in the vacancy posting process, shocks to the separation rate and variations in bargaining power are important determinants of business cycle fluctuations. Our results point primarily towards disturbances in the bargaining process as a significant contributor to inflation and output fluctuations. In sum, the paper supports current central bank practice which appears to put considerable effort into monitoring euro area wage dynamics and which appears to treat some of the other labor market information as less important for monetary policy.

Language
Englisch

Bibliographic citation
Series: Kiel Working Paper ; No. 1513

Classification
Wirtschaft
Business Fluctuations; Cycles
Monetary Policy
Unemployment: Models, Duration, Incidence, and Job Search
Bayesian Analysis: General
Subject
Labor Market
wage rigidity
bargaining
Bayesian estimation
Geldpolitik
Transmissionsmechanismus
Arbeitsmarktflexibilisierung
Lohnrigidität
Konjunktur
Europäische Wirtschafts- und Währungsunion
Ökonometrisches Makromodell
Ungleichgewichtstheorie
Schätzung
Theorie
EU-Staaten

Event
Geistige Schöpfung
(who)
Christoffel, Kai
Kuester, Keith
Linzert, Tobias
Event
Veröffentlichung
(who)
Kiel Institute for the World Economy (IfW)
(where)
Kiel
(when)
2009

Handle
Last update
10.03.2025, 11:42 AM CET

Data provider

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Object type

  • Arbeitspapier

Associated

  • Christoffel, Kai
  • Kuester, Keith
  • Linzert, Tobias
  • Kiel Institute for the World Economy (IfW)

Time of origin

  • 2009

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