Labor Market Shocks and Monetary Policy
Dr. Kurt See
Principal Researcher
Bank of Canada
We develop a heterogeneous agent New Keynesian model featuring a frictional labor market
with on-the-job search to quantitatively study the positive and normative implications of
employer-to-employer (EE) transitions for inflation. We find that EE dynamics played an
important role in shaping the differential inflation dynamics observed during the Great
Recession and COVID-19 recoveries, with the former exhibiting subdued EE transitions
and inflation despite both episodes sharing similar unemployment dynamics. The optimal
monetary policy prescribes a strong positive response to EE fluctuations, implying that
central banks should distinguish between recovery episodes with similar unemployment
but different EE dynamics.