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Search frictions, real rigidities and inflation dynamics

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  • Carlos Thomas

    ()
    (Banco de España)

Abstract

I analyze the effect of search frictions on inflation dynamics, in a New Keynesian model where firms make both pricing and vacancy posting decisions. I find that search frictions create real rigidities in price setting. This mechanism flattens the New Keynesian Phillips curve, relative both to the standard model with a frictionless labor market and a model where pricing and vacancy posting decisions are made by different subsets of firms. This helps the model improve its empirical performance along a number of dimensions. First, inflation becomes more persistent. Second, output responses to monetary shocks become larger and more persistent. Finally, unemployment becomes more volatile.

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File URL: http://www.bde.es/f/webbde/SES/Secciones/Publicaciones/PublicacionesSeriadas/DocumentosTrabajo/08/Fic/dt0806e.pdf
File Function: First version, March 2008
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Bibliographic Info

Paper provided by Banco de Espa�a in its series Banco de Espa�a Working Papers with number 0806.

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Length: 42 pages
Date of creation: Mar 2008
Date of revision:
Handle: RePEc:bde:wpaper:0806

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Keywords: search and matching; real rigidities; New Keynesian Phillips curve;

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