Labour market imperfections, "divine coincidence" and the volatility of employment and inflation

Mirko Abbritti (), Andrea Boitani () and Mirella Damiani ()
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Mirella Damiani: Università di Perugia

No ief0078, DISCE - Quaderni dell'Istituto di Economia e Finanza from Università Cattolica del Sacro Cuore, Dipartimenti e Istituti di Scienze Economiche (DISCE)

Abstract: The dynamic general equilibrium model with hiring costs presented in this paper delivers involuntary unemployment in the steady state as well as involuntary fluctuations in unemployment. The existence of hiring friction introduces externalities that, in turn, entail the breakdown of the "divine coincidence" without assuming real wage rigidity. Our model with labour market imperfections outperforms the standard NK model as for the persistence of responses to monetary shocks. The model also allows for an analysis of the volatility of economies, differing in their "degrees of labour market rigidity". It turns out that "rigid" economies exhibit less unemployment volatility and more inflation volatility than "flexible" economies.

Keywords: Hiring Costs; Wage Bargaining; Output Gap; New Keynesian Phillips Curve (search for similar items in EconPapers)
JEL-codes: E24 E31 E32 E52 J64 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-dge, nep-lab and nep-mac
Date: Written 2008-04
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