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Inflation and Output Dynamics in a Model with Labor Market Search and Capital Accumulation

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  • Burkhard Heer

    (University of Bolzano)

  • Alfred Maussner

    (University of Augsburg)

Abstract

In a sticky-price model with labor market search and habit persistence, Walsh (2005) shows that inertia in the interest rate policy helps to reconcile the inflation and output persistence with empirical observations for the US economy. We show that this finding is sensitive with regard to the introduction of capital formation. While we are able to replicate the findings for the inflation inertia in a model with capital adjustment costs and variable capacity utilization, the output response to an interest shock is found to be too large and no longer hump-shaped in this case. In addition we find that the response of output to a technology shock can only be reconciled with empirical findings if either the adjustment of the utilization rate is very costly or there is only a modest amount of nominal rigidity in the economy. (Copyright: Elsevier)

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Bibliographic Info

Article provided by Elsevier for the Society for Economic Dynamics in its journal Review of Economic Dynamics.

Volume (Year): 13 (2010)
Issue (Month): 3 (July)
Pages: 654-686

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Handle: RePEc:red:issued:07-138

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Keywords: Interest rate policy; Labor market search; Business cycles; Inflation; Capital adjustment costs;

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References

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  1. David Altig & Lawrence Christiano & Martin Eichenbaum & Jesper Linde, 2005. "Firm-Specific Capital, Nominal Rigidities and the Business Cycle," NBER Working Papers 11034, National Bureau of Economic Research, Inc.
  2. Rotemberg, Julio J., 2006. "Cyclical Wages in a Search-and-Bargaining Model with Large Firms," CEPR Discussion Papers, C.E.P.R. Discussion Papers 5791, C.E.P.R. Discussion Papers.
  3. Lawrence J. Christiano & Martin Eichenbaum & Robert Vigfusson, 2003. "What happens after a technology shock?," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 768, Board of Governors of the Federal Reserve System (U.S.).
  4. Kai Christoffel & James Costain & Gregory de Walque & Keith Kuester & Tobias Linzert & Stephen Millard & Olivier Pierrard, 2009. "Inflation dynamics with labour market matching: assessing alternative specifcations," BCL working papers, Central Bank of Luxembourg 38, Central Bank of Luxembourg.
  5. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, Elsevier, vol. 12(3), pages 383-398, September.
  6. Lawrence J. Christiano & Martin Eichenbaum & Charles Evans, 2001. "Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy," NBER Working Papers 8403, National Bureau of Economic Research, Inc.
  7. Eric M. Leeper & Christopher A. Sims & Tao Zha, 1996. "What Does Monetary Policy Do?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 27(2), pages 1-78.
  8. Sims, Christopher A., 1992. "Interpreting the macroeconomic time series facts : The effects of monetary policy," European Economic Review, Elsevier, Elsevier, vol. 36(5), pages 975-1000, June.
  9. Lawrence J. Christiano & Martin Eichenbaum & Robert Vigfusson, 2004. "The Response of Hours to a Technology Shock: Evidence Based on Direct Measures of Technology," NBER Working Papers 10254, National Bureau of Economic Research, Inc.
  10. Trigari, Antonella, 2004. "Equilibrium unemployment, job flows and inflation dynamics," Working Paper Series, European Central Bank 0304, European Central Bank.
  11. Faia, Ester, 2007. "Ramsey monetary policy with labour market frictions," Working Paper Series, European Central Bank 0707, European Central Bank.
  12. King, Robert G & Watson, Mark W, 2002. "System Reduction and Solution Algorithms for Singular Linear Difference Systems under Rational Expectations," Computational Economics, Society for Computational Economics, Society for Computational Economics, vol. 20(1-2), pages 57-86, October.
  13. Neville Francis & Valerie A. Ramey, 2002. "Is the Technology-Driven Real Business Cycle Hypothesis Dead?," NBER Working Papers 8726, National Bureau of Economic Research, Inc.
  14. Baxter, M. & Crucini, M.J., 1990. "Explaining Saving/Investment Correlation," RCER Working Papers, University of Rochester - Center for Economic Research (RCER) 224, University of Rochester - Center for Economic Research (RCER).
  15. Antonella Trigari, 2006. "The Role of Search Frictions and Bargaining for Inflation Dynamics," Working Papers, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University 304, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  16. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 1998. "Monetary Policy Shocks: What Have We Learned and to What End?," NBER Working Papers 6400, National Bureau of Economic Research, Inc.
  17. David Altig & Lawrence Christiano & Martin Eichenbaum & Jesper Linde, 2005. "Online Appendix to "Firm-Specific Capital, Nominal Rigidities and the Business Cycle"," Technical Appendices, Review of Economic Dynamics 09-191, Review of Economic Dynamics.
  18. Massimiliano Marcellino & George Kapetanios, 2006. "The Role of Search Frictions and Bargaining for Inflation Dynamics," Working Papers, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University 305, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
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Cited by:
  1. Bas, Maria & Ledezma, Ivan, 2007. "Market Access and the Evolution of within Plant Productivity in Chile," Economics Papers from University Paris Dauphine, Paris Dauphine University 123456789/6913, Paris Dauphine University.
  2. Burkhard Heer & Alfred Maussner, 2011. "The Cash-In-Advance Constraint in Monetary Growth Models," CESifo Working Paper Series 3647, CESifo Group Munich.
  3. Eran Yashiv & Renato Faccini, 2014. "Inflation Dynamics and Marginal Costs: the Crucial Role of Hiring and Investment Frictions," 2014 Meeting Papers, Society for Economic Dynamics 178, Society for Economic Dynamics.
  4. Auray, Stephane & de Blas, Beatriz, 2011. "Investment, Matching and Persistence in a modified Cash-in-Advance Economy," Working Papers in Economic Theory, Universidad Autónoma de Madrid (Spain), Department of Economic Analysis (Economic Theory and Economic History) 2011/10, Universidad Autónoma de Madrid (Spain), Department of Economic Analysis (Economic Theory and Economic History).

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