Search frictions and the business cycle in a small open economy DSGE model

Guerra-Salas, Juan; Kirchner, Markus; Tranamil-Vidal, Rodrigo

doi:10.1016/j.red.2020.07.005

Cited by 8 publications

(1 citation statement)

References 37 publications

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“…Following Kirchner and Tranamil (2016) and Guerra-Salas, Kirchner, and Tranamil (2018), the labor market is modeled with search and matching frictions as in Mortensen and Pissarides (1994), allowing for both exogenous and endogenous separations, as in Cooley andQuadrini (1999), andden Haan, Ramey, andWatson (2000).…”

Section: Labor Marketmentioning

confidence: 99%

On the Response of Inflation and Monetary Policy to an Immigration Shock

García¹,

Guerra-Salas

2020

SSRN Journal

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An immigration shock has an ambiguous effect on inflation. On one hand, aggregate consumption increases with a suddenly larger population; this "demand channel" creates inflationary pressures. On the other hand, the labor market becomes more slack as immigrants search for jobs, containing wage growth; this "labor supply channel" creates disinflationary pressures. The response of an inflationtargeting central bank to an immigration shock is, therefore, not obvious. We study these competingchannels in a New Keynesian model of a small open economy with search frictions in the labor market. Our simulations are designed to characterize the possible response of inflation and monetary policy in Chile, a small open emerging country that has experienced a substantial immigration flow in recent years. ResumenUna ola inmigratoria tiene un efecto ambiguo sobre la inflación. Por un lado, el consumo agregado aumenta con el crecimiento de la población; este "canal de demanda" genera presiones inflacionarias. Por otro lado, las holguras en el mercado laboral aumentan mientras los inmigrantes buscan empleo; este "canal de oferta laboral" genera presiones desinflacionarias. Por lo tanto, la respuesta de un banco central con metas de inflación a una ola inmigratoria no es obvia. En este trabajo estudiamos estos canales en un modelo Neo-Keynesiano de economía pequeña y abierta con fricciones de búsqueda en el mercado laboral. Nuestras simulaciones están diseñadas para caracterizar la posible respuesta de la inflación y la política monetaria en Chile, una economía emergente pequeña y abierta que ha recibido una ola inmigratoria importante en años recientes.

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