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Identifying the role of labor markets for monetary policy in an estimated DSGE model

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Author Info
Kai Philipp Christoffel () (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
Keith Kuester () (Goethe University Frankfurt, Senckenberganlage 31, 60054 Frankfurt am Main, Germany.)
Tobias Linzert () (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)

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Abstract

We focus on a quantitative assessment of rigid labor markets in an environment of stable monetary policy. We ask how wages and labor market shocks feed into the inflation process and derive monetary policy implications. Towards that aim, we structurally model matching frictions and rigid wages in line with an optimizing rationale in a New Keynesian closed economy DSGE model. We estimate the model using Bayesian techniques for German data from the late 1970s to present. Given the pre-euro heterogeneity in wage bargaining we take this as the first-best approximation at hand for modelling monetary policy in the presence of labor market frictions in the current European regime. In our framework, we find that labor market structure is of prime importance for the evolution of the business cycle, and for monetary policy in particular. Yet shocks originating in the labor market itself may contain only limited information for the conduct of stabilization policy. JEL Classification: E32; E52; J64; C11.

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Paper provided by European Central Bank in its series Working Paper Series with number 635.

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Length: 63 pages
Date of creation: Jun 2006
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Handle: RePEc:ecb:ecbwps:20060635

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Related research
Keywords: Labor market; wage rigidity; bargaining; Bayesian estimation.;

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This paper has been announced in the following NEP Reports: References listed on IDEAS
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  1. Raquel Fonseca & Lise Patureau & Thepthida Sopraseuth, 2008. "Divergence in Labor Market Institutions and International Business Cycles," THEMA Working Papers 2008-14, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise. [Downloadable!]
    Other versions:
  2. Mirko Abbritti; Sebastian Weber, 2008. "Labor Market Rigidities and the Business Cycle: Price vs. Quantity Restricting Institutions," HEI Working Papers 01-2008, Economics Section, The Graduate Institute of International Studies, revised Jan 2008. [Downloadable!]
  3. Adam Elbourne & Debby Lanser & Bert Smid & Martin Vromans, 2008. "Macroeconomic resilience in a DSGE model," CPB Discussion Papers 96, CPB Netherlands Bureau for Economic Policy Analysis. [Downloadable!]
  4. Mark Gertler & Luca Sala & Antonella Trigari, 2008. "An Estimated Monetary DSGE Model with Unemployment and Staggered Nominal Wage Bargaining," Working Papers 341, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University. [Downloadable!]
    Other versions:
  5. Fabrizio Mattesini & Lorenza Rossi, 2007. "Productivity shocks and Optimal Monetary Policy in a Unionized Labor Market Economy," DISCE - Quaderni dell'Istituto di Economia e Finanza ief0072, Università Cattolica del Sacro Cuore, Dipartimenti e Istituti di Scienze Economiche (DISCE). [Downloadable!]
    Other versions:
  6. Michael Krause & David Lopez-Salido & Thomas Lubik, 2008. "Inflation Dynamics With Search Frctions: A Structural Econometric Analysis," CAMA Working Papers 2008-06, Australian National University, Centre for Applied Macroeconomic Analysis. [Downloadable!]
    Other versions:
  7. Mirko Abbritti, 2007. "Unemployment, Inflation and Monetary Policy in a Dynamic New Keynesian Model with Hiring Costs," HEI Working Papers 07-2007, Economics Section, The Graduate Institute of International Studies. [Downloadable!]
    Other versions:
  8. Regis Barnichon, 2008. "Productivity, aggregate demand and unemployment fluctuations," Finance and Economics Discussion Series 2008-47, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
    Other versions:
  9. Rossi, Lorenza & Mattesini, Fabrizio, 2007. "Optimal Monetary Policy in a Dual Labor Market Economy," MPRA Paper 2468, University Library of Munich, Germany, revised 15 Mar 2007. [Downloadable!]
  10. Rossi, Lorenza & Mattesini, Fabrizio, 2007. "Productivity Shock and Optimal Monetary Policy in a Unionized Labor Market. Forthcoming: The Manchester School," MPRA Paper 8414, University Library of Munich, Germany, revised 2008. [Downloadable!]
  11. Mattesini Fabrizio & Rossi Lorenza, 2007. "Optimal monetary policy in economies with dual labor markets," wp.comunite 0009, Department of Communication, University of Teramo. [Downloadable!]
    Other versions:
  12. Keith Kuester, 2007. "Real price and wage rigidities in a model with mataching frictions," Working Paper Series 720, European Central Bank. [Downloadable!]
  13. Mirko Abbritti & Andrea Boitani & Mirella Damiani, 2008. "Labour market imperfections, "divine coincidence" and the volatility of employment and inflation," DISCE - Quaderni dell'Istituto di Economia e Finanza ief0078, Università Cattolica del Sacro Cuore, Dipartimenti e Istituti di Scienze Economiche (DISCE). [Downloadable!]
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