https://macropaperwarehouse.com/authors/tatiana-kirsanova/Tatiana KirsanovaHugo -- gohugo.ioen-ushttps://macropaperwarehouse.com/papers/policy-biases-in-a-model-with-labor-market-frictions/https://macropaperwarehouse.com/papers/policy-biases-in-a-model-with-labor-market-frictions/<p><strong>Research Question</strong></p> <p>Dennis and Kirsanova ask whether shocks to labor-market matching efficiency and worker bargaining power pose a significant problem for monetary policy, and whether the inability to commit (discretion versus commitment) generates important stabilization bias in a model with labor-market matching frictions. They also examine how several popular simple monetary policy rules perform in response to these and other shocks.</p> <p><strong>Model and Methodology</strong></p> <p>The paper develops a fully nonlinear DSGE model featuring: (1) a goods market characterized by monopolistic competition and Rotemberg-style quadratic price-adjustment costs; and (2) a labor market characterized by a constant-returns-to-scale matching function (Mortensen-Pissarides) and Nash bargaining over wages and hours worked. Because the flex-price equilibrium is inefficient — owing to both monopolistic competition and the matching friction — a linear-quadratic approximation is not valid for the discretionary policy problem, and the authors solve the model using Smolyak sparse-grid methods with Chebyshev polynomial basis functions.</p>