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A "Simple" Currency Union Model with Labor Market Frictions, Real Wage Rigidities and Equilibrium Unemployment

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Author Info
Mirko Abbritti () (IUHEI, The Graduate Institute of International Studies, Geneva)

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Abstract

This paper derives a DSGE currency union model with labor market frictions, real wage rigidities and price staggering. The model combines many realistic features, but it is still tractable: like standard open-economy models, it can be closed in six equations. We derive and discuss the constrained efficient allocation and the decentralised equilibrium, under both flexible and sticky prices. We use the model to analyse how different labor market institutions or degrees of real wage rigidities influence the functioning of the currency union and the size and persistence of inflation and output differentials. We show that the presence of non trivial real imperfections affects substantially the transmission mechanism of shocks in general and, in particular, of monetary policy. Interestingly, we find that the implications of real wage rigidities and labor market frictions for business cycle fluctuations are likely to operate in opposite directions: a high degree of real wage rigidities tends to amplify the response of the real economy to shocks; when labor market are more sclerotic, instead, unemployment volatility tends to decrease while inflation volatility increases.

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Publisher Info
Paper provided by Economics Section, The Graduate Institute of International Studies in its series HEI Working Papers with number 09-2007.

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Length: 47
Date of creation: Jan 2007
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Handle: RePEc:gii:giihei:heiwp09-2007

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Related research
Keywords: Currency Union; labor market frictions; real wage rigidities; unemployment; sticky prices; inflation and output differentials;

Find related papers by JEL classification:
E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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References listed on IDEAS
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.:
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    Other versions:
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    Other versions:
  3. Sebastian Weber, 2006. "Labor Market Structures, Trade and their Effect on Unemployment: A Theoretical Analysis and Empirical Investigation," HEI Working Papers 22-2006, Economics Section, The Graduate Institute of International Studies. [Downloadable!]
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    Other versions:
  5. Robert Shimer, 2005. "The Cyclical Behavior of Equilibrium Unemployment and Vacancies," American Economic Review, American Economic Association, vol. 95(1), pages 25-49, March. [Downloadable!]
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  7. Antonella Trigari, 2004. "Labour Market Search, Wage Bargaining and Inflation Dynamics," Working Papers 268, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University. [Downloadable!]
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  9. Mortensen, Dale T & Pissarides, Christopher A, 1994. "Job Creation and Job Destruction in the Theory of Unemployment," Review of Economic Studies, Blackwell Publishing, vol. 61(3), pages 397-415, July. [Downloadable!] (restricted)
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  10. Mirko ABBRITTI & Andrea BOITANI & Mirella DAMIANI, 2006. "Unemployment, inflation and monetary policy in a dynamic New Keynesian model with hiring costs," Quaderni del Dipartimento di Economia, Finanza e Statistica 22/2006, Università di Perugia, Dipartimento Economia, Finanza e Statistica. [Downloadable!]
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  14. Filippo Altissimo & Pierpaolo Benigno & Diego Rodriguez Palenzuela, 2005. "Long-Run Determinants of Inflation Differentials in a Monetary Union," NBER Working Papers 11473, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  15. Blanchard, Olivier Jean & Kahn, Charles M, 1980. "The Solution of Linear Difference Models under Rational Expectations," Econometrica, Econometric Society, vol. 48(5), pages 1305-11, July. [Downloadable!] (restricted)
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  17. Thomas Lubik & Michael Krause, 2003. "The (Ir)relevance of Real Wage Rigidity in the New Keynesian Model with Search Frictions," Economics Working Paper Archive 504, The Johns Hopkins University,Department of Economics. [Downloadable!]
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  18. Alexopoulos, Michelle, 2004. "Unemployment and the business cycle," Journal of Monetary Economics, Elsevier, vol. 51(2), pages 277-298, March. [Downloadable!] (restricted)
Full references

Cited by:
(explanations, 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.)

  1. 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!]
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