Abstract
Internal migration flows are endogenously driven by relative labor market performance in a New Keynesian DSGE model of a monetary union calibrated to U.S. data. When labor markets are competitive, a strict focus on stabilizing unionwide inflation remains close to optimal. With search and matching frictions in regional labor markets, labor mobility across state borders introduces additional trade-offs for optimal monetary policy since workers do not internalize the full effects of their individual migration decisions. But when monetary policy is suboptimal, a mobile labor force helps to close inefficiency gaps in regional labor markets following region-specific shocks. Putting some weight on labor market outcomes in a simple instrument rule enhances welfare more when labor is mobile.
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