Sectoral Labor Mobility and Optimal Monetary Policy

IMF Working Papers, March 6, 2017

Source details

Estimated two-sector New-Keynesian model with durable and nondurable goods.
Key frictions considered: nominal wage stickiness and limited sectoral labor mobility.
Focus variables: durables inflation, nondurables, sectoral labor mobility, sectoral price markup shocks, substitution of durable goods.

An inverse relationship exists between sectoral labor mobility and the optimal weight the central bank should attach to durables inflation.
The combination of nominal wage stickiness and limited labor mobility leads to a nonzero optimal weight for durables inflation even if durables prices were fully flexible.
These results hold under alternative calibrations and interest-rate rules, indicating robustness.
Implication: sectoral labor mobility has a non-negligible role for the conduct of monetary policy.

Central banks should consider sectoral labor mobility when choosing the relative weight assigned to durables inflation in their loss functions.
Even with flexible durables prices, nominal wage stickiness and limited labor mobility warrant a positive policy focus on durables inflation.
Monetary-policy rules and calibrations should account for sectoral interdependencies arising from labor mobility constraints.

Subjects: Inflation, Labor, Labor mobility, Prices, Sticky prices, Wages
Keywords: costs durable goods, DSGE, durable goods, durables inflation, inflation composite, labor mobility, monetary policy rule, monetary policy stance, nondurable goods, Optimal monetary policy, sectoral price markup shock, Sticky prices, substitution durable goods, Wages, WP

Sectoral Labor Mobility and Optimal Monetary Policy; IMF Working Paper WP/17/40; March 1, 2017
- Sectoral Labor Mobility and Optimal Monetary Policy; IMF Working Paper WP/17/40; March 1, 2017 (Markdown version)
- Sectoral Labor Mobility and Optimal Monetary Policy; IMF Working Paper WP/17/40; March 1, 2017 (PDF)