Inflation dynamics with search frictions: A structural econometric analysisMichael Krause (), Lopez-Salido, David and Thomas Lubik () Journal of Monetary Economics, 2008, vol. 55, issue 5, pages 892-916 Abstract: The New Keynesian Phillips curve explains inflation dynamics as being driven by current and expected future real marginal costs. In competitive labor markets, the labor share can serve as a proxy for the latter. In this paper, we study the role of real marginal cost components implied by search frictions in the labor market. We construct a measure of real marginal costs by using newly available labor market data on worker finding rates. Over the business cycle, the measure is highly correlated with the labor share. Estimates of the Phillips curve using generalized method of moments reveal that the marginal cost measure remains significant, and that inflation dynamics are mainly driven by the forward-looking component. Bayesian estimation of the full New Keynesian model with search frictions helps us disentangle which shocks are driving the economy to generate the observed unit labor cost dynamics. We find that mark-up shocks are the dominant force in labor market fluctuations. Date: 2008 Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: http://EconPapers.repec.org/RePEc:eee:moneco:v:55:y:2008:i:5:p:892-916 Access Statistics for this article Journal of Monetary Economics is edited by R. G. King and C. I. Plosser More articles in Journal of Monetary Economics from Elsevier |
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