Faculty of Economics and Business Administration Publications Database

Labor Selection, Turnover Costs, and Optimal Monetary Policy

Lechthaler, Wolfgang
Merkl, Christian
Volume: 46
Number: 1
Pages: 115 - 144
Month: February
ISSN-Print: 0022-2879
Link External Source: Online Version
Year: 2014
Keywords: Optimal monetary policy; Hiring and ring costs; Labor selection; Policy trade-off

We study optimal monetary policy and welfare properties of a dynamic stochastic general equilibrium (DSGE) model with a labor selection process, labor turnover costs, and Nash bargained wages. We show that our model implies inefficiencies that 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.