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Inflation Persistence and Labour Market Frictions: An Estimated Efficiency Wage Model of the Australian Economy

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  • Sean Langcake

    (School of Economics, University of Adelaide)

Abstract

The purpose of this paper is to evaluate whether adding labour market frictions improves the basic New Keynesian model's ability to generate greater inflation persistence and plausible labour market dynamics. This paper builds and compares two sticky price models, one of which is augmented by an efficiency wage model of the labour market. The efficiency wage model is motivated by fair wage considerations, which add a real rigidity to the model that complements nominal price rigidities common to both models. The two models are then extended to capture a series of backward looking behaviours typically used to generate inflation persistence. The key contribution of this paper is that the proposed models are estimated using Bayesian maximum likelihood techniques and Australian data. The results presented show that by adding real wage rigidity, the models' internal propogation and labour market dynamics are significantly improved. The results also demonstrate that the conclusions made elsewhere in the literature using simulated models can be extended to models estimated using Bayesian methods.

Suggested Citation

  • Sean Langcake, 2010. "Inflation Persistence and Labour Market Frictions: An Estimated Efficiency Wage Model of the Australian Economy," School of Economics Working Papers 2010-15, University of Adelaide, School of Economics.
  • Handle: RePEc:adl:wpaper:2010-15
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    File URL: http://www.economics.adelaide.edu.au/research/papers/doc/wp2010-15.pdf
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    References listed on IDEAS

    as
    1. David de la Croix & Gregory de Walque & Rafael Wouters, 2006. "Dynamics and monetary policy in a fair wage model of the business cycle," Working Paper Research 98, National Bank of Belgium.
    2. de la Croix, David & de Walque, Gregory & Wouters, Rafael, 2009. "A Note On Inflation Persistence In A Fair Wage Model Of The Business Cycle," Macroeconomic Dynamics, Cambridge University Press, vol. 13(05), pages 673-684, November.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    efficiency Wage; effort; inflation persistence;

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity

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