Inflation dynamics with search frictions: a structural econometric analysis

Michael Krause, David Lopez-Salido and Thomas Lubik

No 08-01, Working Paper from Federal Reserve Bank of Richmond

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.

Keywords: Inflation; (Finance) (search for similar items in EconPapers)
Date: 2008
New Economics Papers: this item is included in nep-cba and nep-mac
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Citations: View citations in EconPapers (86)

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Related works:
Journal Article: Inflation dynamics with search frictions: A structural econometric analysis (2008)
Working Paper: Inflation Dynamics with Search Frictions: A Structural Econometric Analysis (2008)
Working Paper: INFLATION DYNAMICS WITH SEARCH FRCTIONS: A STRUCTURAL ECONOMETRIC ANALYSIS (2008)
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