Labor Market Rigidities, Sticky Prices, and Monetary Shocks
Carl E. Walsh
UC Santa Cruz
Friday, February 22,
2002
3:00PM - 4:15PM
Saunders Hall 515
Abstract
Nominal rigidities in the form of price and/or wage stickiness play a critical
role in most models that attempt to explain the dynamic response of the economy
to monetary disturbances and policy shocks. However, a number of recent papers
have focuses on the role of real factors in accounting for the persistent effects
of monetary shocks on employment, output and inflation. In this paper, I focus
on labor market rigidities that prevent unemployed workers from finding new
jobs immediately and firms with job vacancies from filling them immediately.
I employ dynamic simulations to investigate the role the job matching process
plays in affecting the economy's dynamic adjustment to shocks and to investigate
the implications for monetary policy. By combining labor market rigidities with
sticky prices, it is possible to study the respective roles of labor market
rigidities and nominal rigidities in accounting for the impact of monetary shocks.