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Search Frictions, Real Rigidities, and Inflation Dynamics

  • CARLOS THOMAS

I analyze the effect of search frictions on inflation dynamics, in a New Keynesian model where firms make both pricing and vacancy posting decisions. I find that search frictions create real rigidities in price setting. This mechanism flattens the New Keynesian Phillips curve, relative both to the standard model with a frictionless labor market and a model where pricing and vacancy posting decisions are made by different subsets of firms. This helps the model improve its empirical performance along a number of dimensions. First, inflation becomes more persistent. Second, output responses to monetary shocks become larger and more persistent. Finally, unemployment becomes more volatile.

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File URL: http://hdl.handle.net/10.1111/j.1538-4616.2011.00420.x
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Article provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.

Volume (Year): 43 (2011)
Issue (Month): 6 (09)
Pages: 1131-1164

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Handle: RePEc:mcb:jmoncb:v:43:y:2011:i:6:p:1131-1164
Contact details of provider: Web page: http://www.blackwellpublishing.com/journal.asp?ref=0022-2879

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