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The New Keynesian Phillips Curve and staggered price and wage determination in a model with firm-specific labor

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  • Carlsson, Mikael
  • Westermark, Andreas

Abstract

We develop a DSGE model with firm-specific labor where wage and price setting are subject to Calvo-type staggering. This is in general an intractable problem due to complicated intertemporal dependencies between price and wage decisions. However, the problem is significantly simplified if we, in line with empirical evidence, assume that prices can be changed whenever wages are. We show that the price- and wage-setting relationships are substantially altered by the introduction of firm-specific labor. Specifically, the inflation response is substantially dampened, whereas the wage inflation response is increased as compared to models with freely mobile labor. These distinctive features of the model with firm-specific labor are supported by empirical evidence from a structural VAR.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 35 (2011)
Issue (Month): 4 (April)
Pages: 579-603

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Handle: RePEc:eee:dyncon:v:35:y:2011:i:4:p:579-603

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Web page: http://www.elsevier.com/locate/jedc

Related research

Keywords: Monetary policy Inflation persistence Labor market Strategic complementarity;

References

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Cited by:
  1. Malikane, Christopher, 2012. "The Microfoundations of the Keynesian Wage-Price Spiral," MPRA Paper 42923, University Library of Munich, Germany, revised 2012.

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