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QUADRATIC LABOR ADJUSTMENT COSTS, BUSINESS CYCLE DYNAMICS, AND OPTIMAL MONETARY POLICY

Published online by Cambridge University Press:  14 September 2012

Wolfgang Lechthaler  and
Dennis J. Snower
Wolfgang Lechthaler*
Affiliation:
Kiel Institute for the World Economy
Dennis J. Snower
Affiliation:
Kiel Institute for the World Economy and University Kiel
*
Address correspondence to: Wolfgang Lechthaler, Hindenburgufer 66, 24105 Kiel, Germany; e-mail: wolfgang.lechthaler@ifw-kiel.de.
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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.

Keywords

Monetary PersistenceLabor Adjustment CostsOptimal Monetary Policy
Type
Notes
Information
Macroeconomic Dynamics , Volume 17 , Issue 2 , March 2013 , pp. 464 - 475
Copyright
Copyright © Cambridge University Press 2012

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