Inflation Persistence and Labour Market Frictions: An Estimated Efficiency Wage Model of the Australian Economy
AbstractThe purpose of this paper is to evaluate whether adding labour market frictions improves the basic New Keynesian model's ability to generate greater inflation persistence and plausible labour market dynamics. This paper builds and compares two sticky price models, one of which is augmented by an efficiency wage model of the labour market. The efficiency wage model is motivated by fair wage considerations, which add a real rigidity to the model that complements nominal price rigidities common to both models. The two models are then extended to capture a series of backward looking behaviours typically used to generate inflation persistence. The key contribution of this paper is that the proposed models are estimated using Bayesian maximum likelihood techniques and Australian data. The results presented show that by adding real wage rigidity, the models' internal propogation and labour market dynamics are significantly improved. The results also demonstrate that the conclusions made elsewhere in the literature using simulated models can be extended to models estimated using Bayesian methods.
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Bibliographic InfoPaper provided by University of Adelaide, School of Economics in its series School of Economics Working Papers with number 2010-15.
Length: 29 pages
Date of creation: Jul 2010
Date of revision:
efficiency Wage; effort; inflation persistence;
Find related papers by JEL classification:
- E24 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-08-06 (All new papers)
- NEP-CBA-2010-08-06 (Central Banking)
- NEP-LAB-2010-08-06 (Labour Economics)
- NEP-MAC-2010-08-06 (Macroeconomics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- de la Croix, David & de Walque, Gregory & Wouters, Rafael, 2009. "A Note On Inflation Persistence In A Fair Wage Model Of The Business Cycle," Macroeconomic Dynamics, Cambridge University Press, vol. 13(05), pages 673-684, November.
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