The role of real wage rigidity and labor market frictions for unemployment and inflation dynamics

Kai Christoffel and Tobias Linzert

No 556, Working Paper Series from European Central Bank

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. JEL Classification: E52, J64, E32, E31

Keywords: inflation persistence; labor market search; matching models; monetary policy; real wage rigidity (search for similar items in EconPapers)
Date: 2005-11
Note: 85234
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (127)

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Related works:
Working Paper: The Role of Real Wage Rigidity and Labor Market Frictions for Unemployment and Inflation Dynamics (2005)
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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:2005556

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