Labor mobility in a monetary union

Staff working papers set out research in progress by our staff, with the aim of encouraging comments and debate.
Published on 12 April 2019

Staff Working Paper No. 786

By Daniela Hauser and Martin Seneca

We study macroeconomic dynamics and optimal monetary policy in an economy with cyclical labor flows across two distinct regions sharing trade links and a common monetary framework. In our New Keynesian DSGE model with search and matching frictions, migration flows are driven by fluctuations in the relative labor market performance across the monetary union. The optimizing monetary policymaker shows greater flexibility in inflation targeting when labor is mobile by leaning somewhat against deviations of migration flows from efficient benchmarks. But strict inflation targeting remains close to optimal. For a given monetary policy, labor mobility facilitates macroeconomic adjustments by reducing efficiency gaps in regional labor markets. Internal migration therefore reduces the welfare costs of following simple suboptimal monetary policy rules in a monetary union.

PDFLabor mobility in a monetary union

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