MONETARY POLICY AND LABOR MARKET IN BRAZIL

ABSTRACT

From a dynamic stochastic general equilibrium (DSGE) model, following Christoffel, Kuester and Linzert (2009), with searching and matching frictions, this study aims to verify the effects of a negative monetary policy shock on the Brazilian labor market. The simulations show that the shock leads to heating of domestic consumption, increased hiring by firms and raising the wage after the bargaining process. However, the same schock reduces the probability of new vacancies be filled, as the increase in the number of matches is less than the increase in available positions, which hinders a sharper fall in unemployment. Finally, the comparison of model standard deviations and correlations to the data points to evidence of a possible strong wage rigity process in the country, hindering the employee’s earnings.

Keywords:
monetary policy; labor market; searching and matching; DSGE