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Inflation Dynamics and Labor Market Dynamics Revisited

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  • Tommy Sveen
  • Lutz Weinke

Abstract

Firms adjust labor both at the intensive and at the extensive margin (see, e.g., Hansen and Sargent 1988). Moreover, employment adjustment is not frictionless (see, e.g., Mortensen and Pissarides 1994). What does this imply for inflation dynamics? To address this question we develop a New Keynesian model featuring two margins of labor adjustment as well as a simultaneous price-setting and employment decision at the firm level. We find that the presence of an empirically plausible labor adjustment decision at the firm level rationalizes strategic complementarities in price-setting which help explain in‡ation dynamics.

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Bibliographic Info

Paper provided by Kiel Institute for the World Economy in its series Kiel Working Papers with number 1368.

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Length: 27 pages
Date of creation: Jun 2007
Date of revision:
Handle: RePEc:kie:kieliw:1368

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  18. Bils, Mark, 1987. "The Cyclical Behavior of Marginal Cost and Price," American Economic Review, American Economic Association, vol. 77(5), pages 838-55, December.
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Cited by:
  1. Willem Van Zandweghe, 2009. "On-the-job search, sticky prices, and persistence," Research Working Paper RWP 09-03, Federal Reserve Bank of Kansas City.
  2. Kuester, Keith, 2010. "Real price and wage rigidities with matching frictions," Journal of Monetary Economics, Elsevier, vol. 57(4), pages 466-477, May.
  3. Christoffel, Kai & Costain, James & de Walque, Gregory & Kuester, Keith & Linzert, Tobias & Millard, Stephen & Pierrard, Olivier, 2009. "Inflation dynamics with labour market matching: assessing alternative specifications," Working Paper Series 1053, European Central Bank.

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