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  5. Persistent Monetary Policy in a Model with Labor Market Frictions

AEA Papers and Proceedings

ISSN 2574-0768 (Print) | ISSN 2574-0776 (Online)

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Persistent Monetary Policy in a Model with Labor Market Frictions

  • Roman Goncharenko
  • Elizaveta Lukmanova
AEA Papers and Proceedings
vol. 112, May 2022
(pp. 496–502)
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Abstract

In a basic New Keynesian DSGE model with involuntary unemployment and inflation target shocks, we study the role of labor markets in the transmission of persistent monetary policy shocks that increase households' inflation expectations. The model predicts that labor market conditions can play an important role in the transmission channel of the persistent inflation target shock: quantitatively realistic labor market frictions increase the expansionary effect of inflation target shock on output by around a half compared to that under the model without labor market frictions. Using VAR analysis, we further provide empirical evidence consistent with the predictions of our theoretical model.

Citation

Goncharenko, Roman, and Elizaveta Lukmanova. 2022. "Persistent Monetary Policy in a Model with Labor Market Frictions." AEA Papers and Proceedings, 112: 496–502. DOI: 10.1257/pandp.20221094

Additional Materials

JEL Classification

  • D84 Expectations; Speculations
  • E12 General Aggregative Models: Keynes; Keynesian; Post-Keynesian
  • E24 Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
  • E31 Price Level; Inflation; Deflation
  • E32 Business Fluctuations; Cycles