Labor Market Institutions and Wage and Inflation Dynamics
AbstractThis paper developes a New Keynesian (NK) model that incorporates standard search and matching structure with firing costs. I analyze how labor market institutions affect the macroeconomic dynamics, in particular, wage and inflation dynamics. I particularly look at two important labor market institutions namely unemployment benefits and firing costs. I find that in countries where unemployment benefits are higher and there are more strict employment protection legislations, inflation and wages become less volatile and more persistent. I also find that the level of these labor market institutions affect how wages and inflation respond to exogenous shocks, in particular, to productivity and monetary policy shocks. I first present some empirical evidence that shows a cross-country link between labor market institutions and wages and inflation. Then I build a dynamic stochastic general equilibrium model which provides theoretical support for this empirical evidence.
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Bibliographic InfoArticle provided by Queensland University of Technology (QUT), School of Economics and Finance in its journal Economic Analysis and Policy (EAP).
Volume (Year): 40 (2010)
Issue (Month): 3 (December)
balance of payments; disequilibrium; exchange rates;
Find related papers by JEL classification:
- F31 - International Economics - - International Finance - - - Foreign Exchange
- F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
- F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
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- Chaudhuri, Sarbajit & Bandopadhyay, Titas Kumar, 2012. "Job-search and foreign capital inflow - a three sector general equilibrium analysis," MPRA Paper 38921, University Library of Munich, Germany.
- Macit, Fatih, 2011. "Labor Market Institutions and Labor Productivity Growth," MPRA Paper 31727, University Library of Munich, Germany.
- Bandopadhyay, Titas Kumar & Chaudhuri, Sarbajit, 2011. "Job-search and FDI in a two-sector general equilibrium model," MPRA Paper 35564, University Library of Munich, Germany.
- Fatih Macit, 2010. "The Role of Labor Market Institutions on Wage and Inflation Dynamics: Empirical Evidence from OECD Economies," Economic Analysis and Policy (EAP), Queensland University of Technology (QUT), School of Economics and Finance, vol. 40(1), pages 64-77, March.
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