It is common knowledge that the standard New Keynesian model is not able to generate a persistent response in output to temporary monetary shocks. We show that this shortcoming can be remedied in a simple and intuitively appealing way through the introduction of labor turnover costs (such as hiring and firing costs). Assuming that it is costly to hire and fire workers implies that the employment rate is slow to converge to its steady state value after a monetary shock. The after-effects of a shock continue to exert an effect on the labor market even long after the shock is over. The sluggishness of the labor market translates to the product market and thus the output effects of the monetary shock become more persistent. Under reasonable calibrations our model generates hump-shaped output responses. In addition, it is able to replicate the Beveridge curve relationship and a negative correlation between job creation and job destruction.

Several contributions have recently assessed the size of fiscal multipliers both in RBC models and New Keynesian models. None of the studies considers a model with frictional labour markets which is a crucial element, particularly at times in which much of the fiscal stimulus has been directed toward labour market measures. We use an open economy model (more specifically a currency area calibrated on the EMU) with labour market frictions in the form of labour turnover costs and workers’ heterogeneity to measure fiscal multipliers. We compute short and long run multipliers and open economy spillovers for five types of fiscal packages: pure demand stimuli and consumption tax cuts return very small multipliers; income tax cut and hiring subsidies deliver larger multipliers as they reduce distortions in sclerotic labour markets; short-time work (German "Kurzarbeit") returns negative short-run multipliers, but stabilises employment. Our model highlights a novel dimension through which multipliers operate, namely the labour demand stimulus which occurs in a model with nonwalrasian labour markets.

We study the macroeconomic effects of deregulating the goods and labor markets. To this end, we introduce endogenous product creation and labor market frictions in an otherwise-standard real business cycle model. Regulation affects producer entry costs, firing restrictions, and unemployment benefits. We find that reforms can have short-run recessionary effects, despite being expansionary in the long run. Estimates from a panel VAR for OECD countries provide empirical support for this result. Moreover, market deregulation has sizable effects on the efficiency of business cycle fluctuations. Increased flexibility in both goods and labor markets lowers the level and volatility of the inefficiency wedges that distort agents ’ equilibrium decisions, leading to a substantial reduction in the welfare cost of business cycles. Nevertheless, individual reforms produce contrasting effects.

We study optimal monetary policy and welfare properties of a DSGE model with a labor selection process, labor turnover costs and Nash bargained wages. We show that our model implies ine ¢ ciencies which cannot be o¤set in a standard wage bargaining regime. We also show that the ine ¢ ciencies rise with the magnitude of …ring costs. As a result, in the optimal Ramsey plan, the optimal ination volatility deviates from zero and is an increasing function of ring costs.

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The ratio of unemployed to vacancies has risen sharply in the UK after the recession of 2008/09. How harmful is it for the long run growth, equity and e ¢ ciency and what sorts of long run cycles does it generate in the economy? With a dynamic computable general equilib-rium model with Pissarides (1979, 2011) and Mortensen and Pissarides (1994) type equilibrium unemployment, impacts of tax-transfer programmes are assessed for the UK. The model con-tains more desirable structure of households and production sectors and includes more type of shocks in preferences, technology, trade and policy instruments for stochastic analyses than is usual in DSGE models. It assesses growth and cycles as well as equity and e ¢ ciency e¤ects of policies simultaneously. Improvements in the matching technology lowers the equilibrium unemployment and raises the long-run growth rate and life time utilities of households and re-duces long run cycles. Matching could be made more e ¢ cient by inuencing the relative price system by optimal set of tax and transfer instruments. Better matching techniques can make transition of job-seekers to employment more e ¢ cient so that the intertemporal labour-leisure and consumption-saving decisions have greater impacts on growth and redistribution reducing uctuations in the economy.

Abstract This paper studies how key labour market stylized facts and the responses of labour market variables to technology shocks vary over the US postwar period. It uses a benchmark dynamic, stochastic, general equilibrium model enriched with labour market frictions and investment-specific technological progress that enables a novel identification scheme based on sign restrictions on a SVAR with time-varying coefficients and stochastic volatility. Key findings are: (i) the volatility in job finding and separation rates has declined over time, while their correlation varies across time; (ii) the job finding rate plays an important role for unemployment, and the two series are strongly negatively correlated over the sample period; (iii) the magnitude of the response of labour market variables to technology shocks varies across the sample period.

*****Preliminary Draft***** This paper examines the labour market matching process by distinguishing its two component stages: the contact stage, in which job searchers make contact with employers and the selection stage, in which they decide whether to match. We construct a theoretical model explaining two-sided selection through microeconomic incentives. Firms face adjustment costs in responding to heterogeneous variations in the characteristics of workers and jobs. Matches and separations are described through firms ’ job offer and firing decisions and workers ’ job acceptance and quit decisions. Our calibrated model for the U.S. can account for important empirical regularities that the conventional matching model cannot.

and labor markets in the Euro Area are characterized by high levels of regulation. OECD (2004) documents the presence of signi…cant regulatory impediments to competition, stringent employment protection legislation and large unemployment bene…ts. Public and academic debates often blamed thick regulation as responsible for the poor economic

The standard two-sector monetary business cycle model suffers from an important deficiency. Since durable good prices are more flexible than non-durable good prices, optimising households build up the stock of durable goods at low cost after a monetary contraction. Consequently, sectoral outputs move in opposite directions. This paper finds that labour market frictions help to understand the so-called sectoral “comovement puzzle”. Our benchmark model with staggered Right-to-Manage wage bargaining closely matches the empirical elasticities of output, employment and hours per worker across sectors. The model with Nash bargaining, in contrast, predicts that firms adjust employment exclusively along the extensive margin.