Monetary policy and the transition costs of a labor market reform

• Type: Article in International Scientific Journal
• Date: 2009

Authors

Álvaro Aguiar (Author) FEP; Ana Ribeiro (Author) FEP

Journal

Title: Journal of Macroeconomics

Vol. 31

Pages: 547-560

ISSN: 0164-0704

Publisher: Elsevier

Indexing

ISI Web of Knowledge - 2 Citations

ISI Web of Science

Scopus - 3 Citations

Scientific classification

FOS: Social sciences > Economics and Business

CORDIS: Social sciences > Economics

Other information

Authenticus ID: P-003-E1W

DOI: 10.1016/j.jmacro.2008.12.007

Abstract (EN): Lagged benefits relative to costs can weaken the incentives to an efficiency-enhancing labor market reform, lending support to the two-handed approach. An accommodating monetary policy, conducted alongside the reform, could help bring positive welfare effects of the reform to the fore. In order to identify the mechanisms through which monetary policy can affect the welfare effects of a reform, we add stylized features of the labor market to a standard New-Keynesian model for monetary policy analysis. A labor market reform is modeled as a structural change inducing a permanent shift in the flexible-price unemployment and output levels. In addition to the permanent gains, the impact of the timing and magnitude of the reform-induced adjustments on the welfare of workers - employed and unemployed is crucial to the transition welfare costs of the reform. Since the adjustments depend not only on the macroeconomic structure, but can also be influenced by monetary policy, we simulate various degrees of output persistence across different policy rules. We find that, if inertias are present, monetary policy affects the adjustment path following reform implementation. In general, the more expansionary (or the less contractionary) the policy is, the faster the recovery to the new steady-state equilibrium is, and therefore the lower the transition costs are.

Language: English

Type (Professor's evaluation): Scientific

No. of pages: 14