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Do Search Frictions Matter for Inflation Dynamics?

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  • Michael U. Krause
  • David J. Lopez-Salido
  • Thomas Lubik

Abstract

We assess the empirical relevance for inflation dynamics of accounting for the presence of search frictions in the labor market. The New Keynesian Phillips curve explains inflation dynamics as being mainly driven by current and expected future marginal costs. Recent empirical research has emphasized different measures of real marginal costs to be consistent with observed inflation persistence. We argue that, allowing for search frictions in the labor market, real marginal cost should also incorporate the cost of generating and maintaining long-term employment relationships, along with conventional measures, such as real unit labor costs. In order to construct a synthetic measure of real marginal costs, we use newly available labor market data on worker finding and separation rates that reflect firing and hiring costs to the firm. We then estimate a New Keynesian Phillips curve using structural econometric techniques.

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Bibliographic Info

Paper provided by Kiel Institute for the World Economy in its series Kiel Working Papers with number 1353.

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Length: 26 pages
Date of creation: Jun 2007
Date of revision:
Handle: RePEc:kie:kieliw:1353

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Citations

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Cited by:
  1. Michael Krause & David Lopez-Salido & Thomas Lubik, 2008. "Inflation Dynamics With Search Frctions: A Structural Econometric Analysis," CAMA Working Papers 2008-06, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  2. Mirko Abbritti & Andreas I. Mueller, 2013. "Asymmetric Labor Market Institutions in the EMU and the Volatility of Inflation and Unemployment Differentials," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 45(6), pages 1165-1186, 09.
  3. Lubik, Thomas A. & Teo, Wing Leong, 2012. "Inventories, inflation dynamics and the New Keynesian Phillips curve," European Economic Review, Elsevier, vol. 56(3), pages 327-346.
  4. Federico Ravenna & Carl E. Walsh, 2007. "Vacancies, Unemployment, and the Phillips Curve," Kiel Working Papers 1362, Kiel Institute for the World Economy.
  5. Federico Ravenna & Carl E. Walsh, 2011. "Welfare-Based Optimal Monetary Policy with Unemployment and Sticky Prices: A Linear-Quadratic Framework," American Economic Journal: Macroeconomics, American Economic Association, vol. 3(2), pages 130-62, April.
  6. Thomas A. Lubik & Wing Leong Teo, 2012. "Deep Habits in the New Keynesian Phillips Curve," CAMA Working Papers 2012-09, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  7. Faccini, Renato & Millard, Stephen & Zanetti, Francesco, 2011. "Wage rigidities in an estimated DSGE model of the UK labour market," Bank of England working papers 408, Bank of England.

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