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On-the-Job Search, Sticky
Prices, and Persistence
By Willem Van Zandweghe
First version: January 2009
This version: October 2009
RWP 09-03
Research Division
Federal Reserve Bank of Kansas City
Abstract
Models of the monetary transmission mechanism often generate
empirically implausible business fluctuations. This paper analyzes the
role of on-the-job search in the propagation of monetary shocks in a
sticky price model with labor market search frictions. Such frictions
induce long-term employment relationships, such that the real marginal
cost is determined by real wages and the cost of an employment
relationship. On-the-job search opens up an extra channel of employment
growth that dampens the response of these two components. Because real
marginal cost rigidity induces small price adjustments, on-the-job
search gives rise to a strong propagation of monetary shocks that
increases output persistence.
Keywords: On-the-job search, cost of an employment relationship, sticky
prices, business fluctuations
JEL Classification: E24, E31, E32
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