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Do search frictions matter for inflation dynamics?

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Author Info

  • Krause, Michael U.
  • Lopez-Salido, David J.
  • Lubik, Thomas A.

Abstract

We assess the empirical relevance for inflation dynamics of accounting for the presence of search frictions in the labor market. The new Keynesian Phillips curve explains inflation as being mainly driven by current and expected future marginal costs. Recent empirical research has emphasized different measures of real marginal costs to be consistent with observed inflation persistence. We argue that, allowing for search frictions in the labor market, real marginal cost should also incorporate the cost of generating and maintaining long-term employment relationships, along with conventional measures, such as real unit labor costs. In order to construct a synthetic measure of real marginal costs, we use newly available labor market data on worker finding and separation rates that reflect hiring and firing costs. We then estimate a new Keynesian Phillips curve by generalized method of moments (GMM) using the imputed marginal cost series as an observable and find that the contribution of labor market frictions in explaining inflation dynamics is small.

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Bibliographic Info

Article provided by Elsevier in its journal European Economic Review.

Volume (Year): 52 (2008)
Issue (Month): 8 (November)
Pages: 1464-1479

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Handle: RePEc:eee:eecrev:v:52:y:2008:i:8:p:1464-1479

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Related research

Keywords: Phillips curve GMM Marginal costs Labor market frictions;

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References

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Citations

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Cited by:
  1. Thomas A. Lubik & Wing Leong Teo, 2012. "Deep Habits in the New Keynesian Phillips Curve," CAMA Working Papers 2012-09, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  2. Thomas A Lubik & Wing Teong Teo, . "Inventories, Inflation Dynamics and the New Keynesian Phillips Curve," Discussion Papers 10/02, University of Nottingham, Centre for Finance, Credit and Macroeconomics (CFCM).
  3. Carl Walsh & Federico Ravenna, 2007. "Vacancies, Unemployment, and the Phillips Curve," 2007 Meeting Papers 1014, Society for Economic Dynamics.
  4. Krause, Michael U. & Lopez-Salido, David & Lubik, Thomas A., 2008. "Inflation dynamics with search frictions: A structural econometric analysis," Journal of Monetary Economics, Elsevier, vol. 55(5), pages 892-916, July.
  5. Mirko Abbritti & Andreas I. Mueller, 2013. "Asymmetric Labor Market Institutions in the EMU and the Volatility of Inflation and Unemployment Differentials," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 45(6), pages 1165-1186, 09.
  6. Paul Middleditch, 2010. "A New Keynesian Model with Heterogeneous Price Setting," Centre for Growth and Business Cycle Research Discussion Paper Series 150, Economics, The Univeristy of Manchester.
  7. Federico Ravenna & Carl E. Walsh, 2011. "Welfare-Based Optimal Monetary Policy with Unemployment and Sticky Prices: A Linear-Quadratic Framework," American Economic Journal: Macroeconomics, American Economic Association, vol. 3(2), pages 130-62, April.
  8. Faccini, Renato & Millard, Stephen & Zanetti, Francesco, 2011. "Wage rigidities in an estimated DSGE model of the UK labour market," Bank of England working papers 408, Bank of England.

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