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Inflation Dynamics and Labor Market Dynamics Revisited

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Author Info
Tommy Sveen
Lutz Weinke

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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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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
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Handle: RePEc:kie:kieliw:1368

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  5. Emi Nakamura & Jón Steinsson, 2008. "Five Facts about Prices: A Reevaluation of Menu Cost Models," The Quarterly Journal of Economics, MIT Press, vol. 123(4), pages 1415-1464, November. [Downloadable!] (restricted)
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  7. 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. [Downloadable!]
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  13. 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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  16. 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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  17. Russell Cooper & Jonathan Willis, 2002. "The cost of labor adjustment : inferences from the gap," Research Working Paper RWP 02-11, Federal Reserve Bank of Kansas City. [Downloadable!]
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  18. Mark Gertler & Luca Sala & Antonella Trigari, 2008. "An Estimated Monetary DSGE Model with Unemployment and Staggered Nominal Wage Bargaining," Working Papers 341, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University. [Downloadable!]
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  19. Basu, Susanto, 2005. "Comment on: "Implications of state-dependent pricing for dynamic macroeconomic modeling"," Journal of Monetary Economics, Elsevier, vol. 52(1), pages 243-247, January. [Downloadable!] (restricted)
  20. Krause, Michael U. & Lubik, Thomas A., 2007. "The (ir)relevance of real wage rigidity in the New Keynesian model with search frictions," Journal of Monetary Economics, Elsevier, vol. 54(3), pages 706-727, April. [Downloadable!] (restricted)
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  21. Andolfatto, David, 1996. "Business Cycles and Labor-Market Search," American Economic Review, American Economic Association, vol. 86(1), pages 112-32, March. [Downloadable!] (restricted)
  22. Cheron, Arnaud & Langot, Francois, 2000. "The Phillips and Beveridge curves revisited," Economics Letters, Elsevier, vol. 69(3), pages 371-376, December. [Downloadable!] (restricted)
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  23. Hansen, Gary D. & Sargent, Thomas J., 1988. "Straight time and overtime in equilibrium," Journal of Monetary Economics, Elsevier, vol. 21(2-3), pages 281-308. [Downloadable!] (restricted)
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  24. 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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  1. 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," Bank of England working papers 375, Bank of England. [Downloadable!]
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