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INFLATION DYNAMICS WITH SEARCH FRCTIONS: A STRUCTURAL ECONOMETRIC ANALYSIS

Michael Krause (), David Lopez-Salido () and Thomas Lubik

CAMA Working Papers from Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University

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 GMM 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.

JEL-codes: E24 E32 J64 (search for similar items in EconPapers)
Date: 2008-03
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Related works:
Journal Article: Inflation dynamics with search frictions: A structural econometric analysis (2008) Downloads
Working Paper: Inflation Dynamics with Search Frictions: A Structural Econometric Analysis (2008) Downloads
Working Paper: Inflation dynamics with search frictions: a structural econometric analysis (2008) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:een:camaaa:2008-06

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