Abstract :
Centralbankersfrequentlysuggestthatlabormarketreformmaybebeneficialfor
inflationmanagement.Thispaperinvestigatesthistopicbysimulatingtheeffectsof
reductions infiringcostsandunemploymentbenefitsoninflationvolatilityintheEuro
Area, usinganestimatedNewKeynesianmodelwithsearchandmatchingfrictions.
Qualitatively,changesinlabormarketpoliciesalterthevolatilityofinflationinresponse
to shocks,byaffectingthevolatilityofthethreecomponentsofrealmarginalcosts
(hiringcosts,firingcostsandwagecosts).Quantitatively,wefind,however,thatneither
policy islikelytohaveanimportanteffectoninflationvolatility,duetothesmall
contributionofhiringandfiringcoststoinflationdynamics
