Wage rigidities in an estimated DSGE model of the UK labour market

Renato Faccini, Stephen Millard and Francesco Zanetti

No 408, Bank of England working papers from Bank of England

Abstract: We estimate a New Keynesian model with matching frictions and nominal wage rigidities on UK data. We are able to identify important structural parameters, recover the unobservable shocks that have affected the UK economy since 1971 and study the transmission mechanism. With matching frictions, wage rigidities have limited effect on inflation dynamics, despite improving the empirical performance of the model. The reason is that with matching frictions, marginal costs depend on unit labour costs and on an additional component related to search costs. Wage rigidities affect both components in opposite ways leaving marginal costs and inflation virtually unaffected.

Keywords: DSGE models; Bayesian estimation; labour market search; unemployment (search for similar items in EconPapers)
JEL-codes: E24 E32 E52 J64 (search for similar items in EconPapers)
Pages: 44 pages
Date: 2011-02-21
New Economics Papers: this item is included in nep-cba, nep-dge, nep-lab and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (16)

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Persistent link: https://EconPapers.repec.org/RePEc:boe:boeewp:0408

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