Quadratic Labor Adjustment Costs, Business Cycle Dynamics and Optimal Monetary Policy

Authors

• Lechthaler
• W.
• Snower
• D.J.

Publication Date

JEL Classification

Key Words

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 similar vein as 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.

Kiel Institute Expert