Banks' regulatory buffers, liquidity networks and monetary policy transmission

Based on a quarterly regulatory dataset for German banks from 1999 to 2004, this paper analyzes the effects of banks’ regulatory capital on the transmission of monetary policy in a system of liquidity networks. The dynamic panel regression results provide evidence in favor of the bank capital channel theory. Banks holding less regulatory capital and less interbank liquidity react more restrictively to a monetary tightening than their peers. --Monetary policy transmission,Bank lending channel,Bank capital channel,Liquidity networks

Extensive vs. Intensive Margin in Germany and the United States: Any Differences?

This paper analyzes the role of the extensive vis-à-vis the intensive margin of labor adjustment in Germany and in the United States. The contribution is twofold. First, we provide an update of older U.S. studies and confirm the view that the extensive margin (i.e., the adjustment in the number of workers) explains the largest part in the overall variability in aggregate hours. Second, although the German labor market structure is very different from its U.S. counterpart, the quantitative importance of the extensive margin is of similar magnitude.variance decomposition, extensive and intensive margin, business cycle

Macroeconomic Volatilities and the Labor Market: First Results from the Euro Experiment

This paper analyzes the effects of different labor market institutions on inflation and output volatility. The eurozone offers an unprecedented experiment for this exercise: since 1999, no national monetary policies have been implemented that could account for volatility differences across member states, but labor market characteristics have remained very diverse. We use a New Keynesian model with unemployment to predict the effects of different labor market institutions on macroeconomic volatilities. In our subsequent empirical estimations, we find that higher labor turnover costs have a statistically significant negative effect on output volatility, while replacement rates have a positive effect, both of which are in line with theory. While labor market institutions have a large effect on output volatility, they do not seem to have much of an effect on inflation volatility, which can also be rationalized by our theoretical model.eurozone, unemployment, labor market institutions, output and inflation volatility, labor turnover costs, unemployment benefits

The inflation-output tradeoff: which type of labor market rigidity is to be blamed?

In the standard New Keynesian sticky price model the central bank faces no contradiction between the stabilization of inflation and the stabilization of the welfare relevant output gap after a productivity shock hits the economy. When the standard model is enhanced by real wage rigidities or labor turnover costs, an endogenous short-run inflation-output tradeoff arises. This paper compares the implications of the two labor market rigidities. It argues that economists and policymakers alike should pay more attention to labor turnover costs for the following reasons. First, a model with labor turnover costs generates impulse response functions that are more in line with the empirical evidence than those of a model with real wage rigidities. Second, labor turnover costs are the dominant source for the inflation-output tradeoff when both rigidities are present in the model. And finally, there is stronger empirical evidence for the existence of labor turnover costs than for real wage rigidities

Selective hiring and welfare analysis in labor market models

Firms select not only how many, but also which workers to hire. Yet, in standard search models of the labor market, all workers have the same probability of being hired. We argue that selective hiring crucially affects welfare analysis. Our model is isomorphic to a search model under random hiring but allows for selective hiring. With selective hiring, the positive predictions of the model change very little, but the welfare costs of unemployment are much larger because unemployment risk is distributed unequally across workers. As a result, optimal unemployment insurance may be higher and welfare is lower if hiring is selective.labor market models, welfare, optimal unemployment insurance

Disinflationary booms?

This paper shows that announced credible disinflations under inflation targeting lead to a boom in a standard New Keynesian model (i.e. a disinflationary boom). This finding is robust with respect to various parameterizations and disinflationary experiments. Thus, it differs from previous findings about disinflationary booms under monetary targeting

Monetary Persistence and the Labor Market: A New Perspective

In this paper we propose a novel way to model the labor market in the context of a New-Keynesian general equilibrium model, incorporating labor market frictions in the form of hiring and firing costs. We show that such a model is able to replicate many important stylized facts of the business cycle. The reactions to monetary and real shocks become much more sluggish. Job creation and job destruction are negatively correlated. And the volatility of unemployment is much larger than in the standard search and matching model.monetary persistence, labor market, hiring and firing costs

They are even larger! More (on) puzzling labor market volatilities

"This paper shows that the German labor market is more volatile than the US labor market at the business cycle frequency. Specifically, the volatility of the cyclical component of several labor market variables (e.g., the job-finding rate, the labor market tightness and vacancies) divided by the volatility of labor productivity is roughly twice as large as in the United States. We derive and simulate a simple model to explain this seemingly puzzling result. This new model provides explanations for this phenomenon, in particular the longer job tenure in Germany." (Author's abstract, IAB-Doku) ((en))Arbeitsmarktindikatoren - internationaler Vergleich, Beschäftigungsschwankung, offene Stellen, Arbeitsproduktivität, Konjunkturabhängigkeit, Betriebszugehörigkeit, Beschäftigungsdauer, Arbeitslosenquote, labour turnover, Kündigung - Quote, Lohnhöhe, institutionelle Faktoren, Lohnfindung, matching - Quote, Produktivitätsentwicklung, USA, Bundesrepublik Deutschland

Fiscal Multipliers and the Labour Market in the Open Economy

Several contributions have recently assessed the size of fiscal multipliers both in RBC models and New Keynesian models. None of the studies considers a model with frictional labour markets which is a crucial element, particularly at times in which much of the fiscal stimulus has been directed toward labour market measures. We use an open economy model (more specifically, a currency area calibrated to the European Monetary Union) with labour market frictions in the form of labour turnover costs and workers’ heterogeneity to measure fiscal multipliers. We compute short and long run multipliers and open economy spillovers for five types of fiscal packages: pure demand stimuli and consumption tax cuts return very small multipliers; income tax cuts and hiring subsidies deliver larger multipliers, as they reduce distortions in sclerotic labour markets; short-time work (German "Kurzarbeit") returns negative short-run multipliers, but stabilises employment. Our model highlights a novel dimension through which multipliers operate, namely the labour demand stimulus which occurs in a model with non-walrasian labour markets.fiscal multipliers, fiscal packages, labour market frictions

Labor Turnover Costs, Workers' Heterogeneity, and Optimal Monetary Policy

We study the design of optimal monetary policy in a New Keynesian model with labor turnover costs in which wages are set according to a right to manage bargaining where the firms' counterpart is given by currently employed workers. Our model captures well the salient features of European labor market, as it leads to sclerotic dynamics of worker flows. The coexistence of those types of labor market frictions alongside with sticky prices gives rise to a non-trivial trade-off for the monetary authority. In this framework, firms and current employees extract rents and the policy maker finds it optimal to use state contingent inflation taxes/subsidies to smooth those rents. Hence, in the optimal Ramsey plan, inflation deviates from zero and the optimal volatility of inflation is an increasing function of firing costs. The optimal rule should react to employment alongside inflation.optimal monetary policy, hiring and firing costs, labor market frictions, policy trade-off