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QUADRATIC LABOR ADJUSTMENT COSTS, BUSINESS CYCLE DYNAMICS, AND OPTIMAL MONETARY POLICY
Published online by Cambridge University Press: 14 September 2012
Abstract
We build quadratic labor adjustment costs into an otherwise standard New Keynesian model of the business cycle and show that this increases output persistence in a vein similar to that of other models of labor market frictions. Furthermore, we demonstrate the implication of quadratic labor adjustment costs for monetary policy. We show that there is a simple rule determining whether quadratic labor adjustment costs imply a trade-off between stabilizing inflation and output.
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- Copyright © Cambridge University Press 2012
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