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Labour Market Search, Wage Bargaining and Inflation Dynamics

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  • Antonella Trigari

Abstract

This paper integrates a theory of equilibrium unemployment into a monetary model with nominal price rigidities. The model is used to study the dynamic response of the economy to a monetary policy shock. The labor market displays search and matching frictions and bargaining over real wages and hours of work. Search frictions generate unemployment in equilibrium. Wage bargaining introduces a microfounded real wage rigidity. First, I study a Nash bargaining model. Then, I develop an alternative bargaining model, which I refer to as right-to-manage bargaining. Both models have similar predictions in terms of real wage dynamics: bargaining significantly reduces the volatility of the real wage. But they have different implications for inflation dynamics: under right-to-manage, the real wage rigidity also results in smaller fluctuations of inflation. These findings are consistent with recent evidence suggesting that real wages and inflation only vary by a moderate amount in response to a monetary shock. Finally, the model can explain important features of labor-market fluctuations. In particular, a monetary expansion leads to a rise in job creation and to a hump-shaped decline in unemployment.

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Bibliographic Info

Paper provided by IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University in its series Working Papers with number 268.

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Date of creation: 2004
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Handle: RePEc:igi:igierp:268

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  1. Gali, Jordi & Gertler, Mark & Lopez-Salido, J. David, 2001. "European inflation dynamics," European Economic Review, Elsevier, vol. 45(7), pages 1237-1270.
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  20. Antonella Trigari, 2009. "Equilibrium Unemployment, Job Flows, and Inflation Dynamics," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 41(1), pages 1-33, 02.
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Citations

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Cited by:
  1. Christoffel, Kai & Linzert, Tobias, 2005. "The Role of Real Wage Rigidity and Labor Market Frictions for Unemployment and Inflation Dynamics," IZA Discussion Papers 1896, Institute for the Study of Labor (IZA).
  2. 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.).
  3. Mirko Abbritti; Sebastian Weber, 2008. "Labor Market Rigidities and the Business Cycle: Price vs. Quantity Restricting Institutions," IHEID Working Papers 01-2008, Economics Section, The Graduate Institute of International Studies, revised Jan 2008.
  4. Raquel Fonseca & Lise Patureau, 2008. "Divergence in Labor Market Institutions and International Business Cycles," Working Papers 562, RAND Corporation Publications Department.
  5. Andrea Vaona, 2006. "Merging the Purchasing Power Parity and the Phillips Curve Literatures: Regional Evidence from Italy," Working Papers 33, University of Verona, Department of Economics.
  6. Antonella Trigari, 2006. "The Role of Search Frictions and Bargaining for Inflation Dynamics," Working Papers 304, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  7. James M. Nason & George A. Slotsve, 2004. "Along the New Keynesian Phillips curve with nominal and real rigidities," Working Paper 2004-9, Federal Reserve Bank of Atlanta.
  8. Rumler, Fabio & Scharler, Johann, 2009. "Labor market institutions and macroeconomic volatility in a panel of OECD countries," Working Paper Series 1005, European Central Bank.
  9. J. Boscá & A. Díaz & R. Doménech & J. Ferri & E. Pérez & L. Puch, 2010. "A rational expectations model for simulation and policy evaluation of the Spanish economy," SERIEs, Spanish Economic Association, vol. 1(1), pages 135-169, March.
  10. Mirko Abbritti, 2007. "Unemployment, Inflation and Monetary Policy in a Dynamic New Keynesian Model with Hiring Costs," IHEID Working Papers 07-2007, Economics Section, The Graduate Institute of International Studies.
  11. Mirko Abbritti, 2007. "A "Simple" Currency Union Model with Labor Market Frictions, Real Wage Rigidities and Equilibrium Unemployment," IHEID Working Papers 09-2007, Economics Section, The Graduate Institute of International Studies.

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