Inflation Persistence and Labour Market Frictions: An Estimated Efficiency Wage Model of the Australian Economy

Sean Langcake
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Sean Langcake: School of Economics, University of Adelaide

No 2010-15, School of Economics and Public Policy Working Papers from University of Adelaide, School of Economics and Public Policy

Abstract: The purpose of this paper is to evaluate whether adding labour market frictions improves the basic New Keynesian model's ability to generate greater inflation persistence and plausible labour market dynamics. This paper builds and compares two sticky price models, one of which is augmented by an efficiency wage model of the labour market. The efficiency wage model is motivated by fair wage considerations, which add a real rigidity to the model that complements nominal price rigidities common to both models. The two models are then extended to capture a series of backward looking behaviours typically used to generate inflation persistence. The key contribution of this paper is that the proposed models are estimated using Bayesian maximum likelihood techniques and Australian data. The results presented show that by adding real wage rigidity, the models' internal propogation and labour market dynamics are significantly improved. The results also demonstrate that the conclusions made elsewhere in the literature using simulated models can be extended to models estimated using Bayesian methods.

Keywords: efficiency Wage; effort; inflation persistence (search for similar items in EconPapers)
JEL-codes: E24 (search for similar items in EconPapers)
Pages: 29 pages
Date: 2010-07
New Economics Papers: this item is included in nep-cba, nep-lab and nep-mac
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