RWP 24-04, May 2024
We study the positive and normative implications for inflation of employer-to-employer (EE) worker transitions by developing a heterogeneous agent New Keynesian model featuring a frictional labor market with on-the-job search. We find that EE dynamics played an important role in shaping the differential inflation dynamics observed during the Great Recession and COVID-19 recoveries. Despite both recoveries sharing similar unemployment dynamics, the recovery from the Great Recession exhibited subdued EE transitions and inflation dynamics. In our model, the optimal monetary policy involves a strong positive response to EE fluctuations, suggesting that central banks should distinguish between recovery episodes with different EE dynamics even if they have similar unemployment rates.
JEL Classifications: E12, E24, E52, J31, J62, J64
Article Citation
Birinci, Serdar, Fatih Karahan, Yusuf Mercan, and Kurt See. 2024. “Labor Market Shocks and Monetary Policy.” Federal Reserve Bank of Kansas City, Research Working Paper no. 24-04, May. Available at External Linkhttps://doi.org/10.18651/RWP2024-04