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The Role of Search Frictions and Bargaining for Inflation Dynamics

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Antonella Trigari

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Abstract

This paper develops a dynamic general equilibrium model that integrates labor market search and matching into an otherwise standard New Keynesian model. I allow for changes of the labor input at both the extensive and the intensive margin and develop two alternative specifications of the bargaining process. Under efficient bargaining (EB) hours are determined jointly by the firm and the worker as a part of the same Nash bargain that determines wages. With right to manage (RTM), instead, firms retain the right to set hours of work unilaterally. I show that introducing search and matching frictions affects the cyclical behavior of real marginal costs by way of two different channels: a wage channel under RTM and an extensive margin channel under EB. In both cases, the presence of search and matching frictions may cause a lower elasticity of marginal costs with respect to output and thus help to account for the observed inertia in inflation.

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Paper provided by IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University in its series Working Papers with number 304.

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Handle: RePEc:igi:igierp:304

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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. Antonella Trigari, 2004. "Equilibrium unemployment, job flows and inflation dynamics," Working Paper Series 304, European Central Bank. [Downloadable!]
  2. Andrew T. Levin & Alexei Onatski & John C. Williams & Noah Williams, 2005. "Monetary policy under uncertainty in micro-founded macroeconometric models," Working Papers in Applied Economic Theory 2005-15, Federal Reserve Bank of San Francisco. [Downloadable!]
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  3. Kai Christoffel & Tobias Linzert, 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). [Downloadable!]
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  4. Jeffrey C. Fuhrer, 2000. "Habit Formation in Consumption and Its Implications for Monetary-Policy Models," American Economic Review, American Economic Association, vol. 90(3), pages 367-390, June. [Downloadable!] (restricted)
  5. Cooley, Thomas F. & Quadrini, Vincenzo, 1999. "A neoclassical model of the Phillips curve relation," Journal of Monetary Economics, Elsevier, vol. 44(2), pages 165-193, October. [Downloadable!] (restricted)
  6. Wouter J. den Haan & Garey Ramey & Joel Watson, 2000. "Job Destruction and Propagation of Shocks," American Economic Review, American Economic Association, vol. 90(3), pages 482-498, June. [Downloadable!] (restricted)
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  7. 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!] (restricted)
  8. Robert E. Hall, 2005. "Job Loss, Job Finding, and Unemployment in the U.S. Economy Over the Past Fifty Years," NBER Working Papers 11678, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  9. Mark Gertler & Antonella Trigari, 2006. "Unemployment fluctuations with staggered Nash wage bargaining," Proceedings, Federal Reserve Bank of San Francisco. [Downloadable!]
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  10. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 1998. "Monetary Policy Shocks: What Have We Learned and to What End?," NBER Working Papers 6400, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  11. 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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  12. Frank Smets & Raf Wouters, 2003. "An Estimated Dynamic Stochastic General Equilibrium Model of the Euro Area," Journal of the European Economic Association, MIT Press, vol. 1(5), pages 1123-1175, 09. [Downloadable!] (restricted)
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  13. Hosios, Arthur J, 1990. "On the Efficiency of Matching and Related Models of Search and Unemployment," Review of Economic Studies, Blackwell Publishing, vol. 57(2), pages 279-98, April. [Downloadable!] (restricted)
  14. Gali, Jordi & Gertler, Mark & Lopez-Salido, J. David, 2001. "European inflation dynamics," European Economic Review, Elsevier, vol. 45(7), pages 1237-1270. [Downloadable!] (restricted)
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  15. Richard Clarida & Jordi Galí & Mark Gertler, 2000. "Monetary Policy Rules And Macroeconomic Stability: Evidence And Some Theory," The Quarterly Journal of Economics, MIT Press, vol. 115(1), pages 147-180, February. [Downloadable!] (restricted)
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  16. 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. [Downloadable!]
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  17. David Card, 1991. "Intertemporal Labor Supply: An Assessment," NBER Working Papers 3602, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  18. Lawrence J. Christiano & Martin Eichenbaum & Charles Evans, 2001. "Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy," NBER Working Papers 8403, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  19. Merz, Monika, 1995. "Search in the labor market and the real business cycle," Journal of Monetary Economics, Elsevier, vol. 36(2), pages 269-300, November. [Downloadable!] (restricted)
  20. Jean-Olivier Hairault, 2002. "Labor-Market Search and International Business Cycles," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 5(3), pages 535-558, July. [Downloadable!] (restricted)
  21. Marcus Hagedorn & Iourii Manovskii, 2005. "The Cyclical Behavior of Equilibrium Unemployment and Vacancies Revisited," 2005 Meeting Papers 460, Society for Economic Dynamics.
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  22. Robert E. Hall, 2005. "Employment Fluctuations with Equilibrium Wage Stickiness," American Economic Review, American Economic Association, vol. 95(1), pages 50-65, March. [Downloadable!] (restricted)
  23. Barbara Petrongolo & Christopher A. Pissarides, 2001. "Looking into the Black Box: A Survey of the Matching Function," Journal of Economic Literature, American Economic Association, vol. 39(2), pages 390-431, June. [Downloadable!] (restricted)
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  24. 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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  25. Andolfatto, David, 1996. "Business Cycles and Labor-Market Search," American Economic Review, American Economic Association, vol. 86(1), pages 112-32, March. [Downloadable!] (restricted)
  26. Carl Walsh, 2003. "Labor Market Search, Sticky Prices, and Interest Rate Policies," Santa Cruz Center for International Economics, Working Paper Series 1001, Center for International Economics, UC Santa Cruz. [Downloadable!]
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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. 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:
  2. 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!]
  3. Carlos Thomas, 2006. "Search and Matching Frictions and Optimal Monetary Policy," CEP Discussion Papers dp0743, Centre for Economic Performance, LSE. [Downloadable!]
  4. Olivier Blanchard & Jordi Galí, 2007. "A New Keynesian Model with Unemployment," CFS Working Paper Series 2007/08, Center for Financial Studies. [Downloadable!]
    Other versions:
  5. Tommy Sveen & Lutz Weinke, 2007. "Inflation Dynamics and Labor Market Dynamics Revisited," Kiel Working Papers 1368, Kiel Institute for the World Economy. [Downloadable!]
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