The Role of Real Wage Rigidity and Labor Market Frictions for Unemployment and Inflation Dynamics

Kai Christoffel and Tobias Linzert

No 1896, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: In this paper we incorporate a labor market with matching frictions and wage rigidities into the New Keynesian business cycle model. In particular, we analyze the effect of a monetary policy shock and investigate how labor market frictions affect the transmission process of monetary policy. The model allows real wage rigidities to interact with adjustments in employment and hours affecting inflation dynamics via marginal costs. We find that the response of unemployment and inflation to an interest rate innovation depends on the degree of wage rigidity. Generally, more rigid wages translate into more persistent movements of aggregate inflation. Moreover, the impact of a monetary policy shock on unemployment and inflation depends also on labor market fundamentals such as bargaining power and the flows in and out of employment.

Keywords: inflation persistence; labor market search; matching models; monetary policy; real wage rigidity (search for similar items in EconPapers)
JEL-codes: E31 E32 E52 J64 (search for similar items in EconPapers)
Pages: 40 pages
Date: 2005-12
New Economics Papers: this item is included in nep-cba, nep-lab and nep-mac
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Citations: View citations in EconPapers (138)

Published - published in: Journal of Money, Credit and Banking, 2010, 42 (7), 1435-1446

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Working Paper: The role of real wage rigidity and labor market frictions for unemployment and inflation dynamics (2005)
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