Real price and wage rigidities in a model with mataching frictions

Keith Kuester ()
Additional contact information
Keith Kuester: European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany., http://www.ecb.europa.eu/home/html/index.en.html

No 720, Working Paper Series from European Central Bank

Abstract: This paper incorporates search and matching frictions in the labor market into a New Keynesian model. In contrast to the literature, the labor market activity takes place in the (Calvo-staggered) price-setting sector. Matching frictions lead price-setting firms to negotiate wage rates with their employees. The negotiation of wages substantially increases strategic complementarity in price-setting among suppliers of differentiated goods. This leads to an increase in real rigidities as in Woodford (2003), which reduces the size of price changes optimally chosen by re-optimizing firms. The same factors which induce smooth inflation also dampen the adjustment of wages in response to shocks. In the search and matching framework this is key for explaining the highly responsive nature of vacancies in the data. Another interesting finding for the Phillips curve is that inflation is not only driven by an output gap but also by an employment gap – a feature usually neglected in empirical research. The modified model matches impulse responses of an SVAR for post Volcker-disinflation US data very well. JEL Classification: E31,E24,E32,J63,J64.

Keywords: firm-specific labor; real rigidities; Phillips curve; wage rigidity; bargaining. (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba and nep-mac
Date: Written 2007-02
View list of references

Downloads: (external link)
http://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp720.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Ordering information: This working paper can be ordered from
Press and Information Division, European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany

Access Statistics for this paper

More papers in Working Paper Series from European Central Bank
Address: Postfach 16 03 19, Frankfurt am Main, Germany
Contact information at EDIRC.
Series data maintained by Official Publications ().