Labor market reform and price stability: an application to the Euro Area

• Autores: Carlos Thomas, Francesco Zanetti
• Localización: Documentos de trabajo - Banco de España, ISSN 0213-2710, Nº 18, 2008, págs. 1-35
• Idioma: inglés
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• Resumen

  • This paper studies the effect of labor market reform, in the form of reductions in fi ring costs and unemployment benefits, on inflation volatility. With this purpose, we build a New Keynesian model with search and matching frictions in the labor market, and estimate it using Euro Area data. Qualitatively, changes in labor market policies alter the volatility of inflation in response to shocks, by affecting the volatility of the three components of real marginal costs (hiring costs, firing costs and wage costs). Quantitatively, we find however that neither policy is likely to have an important effect on inflation volatility, due to the small impact of changes in the volatility of the labor market on inflation dynamics.