Optimal Monetary Policy with Labor Market Frictions and Real Wage Rigidity: The Role of the Wage Channel

Employment, Hours and Optimal Monetary Policy

“…In the next paragraph, we show that the deviation from price stability depends on the size of the two distortions. This …nding di¤ers from Sunakawa (2013) who shows that the Ramsey policy does not deviate from price stability in a search-andmatching model with right-to-manage and instantaneous hiring. With instantaneous hiring, a worker's shadow value depends on his marginal productivity.…”

“…The dashed line displays the marginal product of hours (13). The line with circles displays the real marginal wage determined through bargaining (32). The dotted line displays the marginal rate of substitution (9) when c = 0 and consumption is e¢ cient.…”

“…With instantaneous hiring as in Sunakawa (2013), the marginal worker generates pro…ts by contributing directly to production. With predetermined employment, an additional worker contributes to current pro…ts by reducing the wage payments to all existing workers, creating a 'wage externality'.…”

Employment, Hours and Optimal Monetary Policy

“…Our speci…cation of price rigidities follows Faia (2009) and Sunakawa (2013), but di¤ers from Barnichon (2010), Kuester (2010) and Thomas (2011), who adopt Calvo (1983) price staggering. The price set by a …rm determines the shadow value of the marginal worker, and thus its hiring decision.…”

“…Faia (2009) shows that deviations from the e¢ cient steady state, through the Hosios condition, imply that optimal monetary policy does not fully stabilize prices. Sunakawa (2013) extends this analysis by assuming that hours are chosen in a rightto-manage fashion. Importantly, unlike that author, employment is predetermined in our model.…”