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Search frictions, real rigidities and inflation dynamics

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  • Carlos Thomas

    () (Banco de España)

Abstract

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.

Suggested Citation

  • Carlos Thomas, 2008. "Search frictions, real rigidities and inflation dynamics," Working Papers 0806, Banco de España;Working Papers Homepage.
  • Handle: RePEc:bde:wpaper:0806
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    Cited by:

    1. Van Zandweghe, Willem, 2010. "On-the-job search, sticky prices, and persistence," Journal of Economic Dynamics and Control, Elsevier, vol. 34(3), pages 437-455, March.
    2. Theodoridis, Konstantinos & Zanetti, Francesco, 2014. "News and labour market dynamics in the data and in matching models," Bank of England working papers 488, Bank of England.
    3. Carlsson, Mikael & Westermark, Andreas, 2011. "The New Keynesian Phillips Curve and staggered price and wage determination in a model with firm-specific labor," Journal of Economic Dynamics and Control, Elsevier, vol. 35(4), pages 579-603, April.
    4. Krause, Michael U. & Lopez-Salido, David & Lubik, Thomas A., 2008. "Inflation dynamics with search frictions: A structural econometric analysis," Journal of Monetary Economics, Elsevier, vol. 55(5), pages 892-916, July.
    5. Christiano, Lawrence J. & Trabandt, Mathias & Walentin, Karl, 2010. "DSGE Models for Monetary Policy Analysis," Handbook of Monetary Economics,in: Benjamin M. Friedman & Michael Woodford (ed.), Handbook of Monetary Economics, edition 1, volume 3, chapter 7, pages 285-367 Elsevier.
    6. Foerster, Andrew T. & Mustre-del-Rio, Jose, 2014. "Search with wage posting under sticky prices," Research Working Paper RWP 14-17, Federal Reserve Bank of Kansas City.
    7. 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.
    8. Christiano, Lawrence & Trabandt, Mathias & Walentin, Karl, 2010. "Involuntary unemployment and the business cycle," Working Paper Series 1202, European Central Bank.
    9. Casares, Miguel, 2013. "On firm-level, industry-level, and aggregate employment fluctuations," Journal of Economic Dynamics and Control, Elsevier, vol. 37(12), pages 2963-2978.
    10. Sergio A. Lago Alves, 2012. "Trend Inflation and the Unemployment Volatility Puzzle," Working Papers Series 277, Central Bank of Brazil, Research Department.
    11. Aitor Erce, 2008. "A structural model of sovereign debt issuance: assessing the role of financial factors," Working Papers 0809, Banco de España;Working Papers Homepage.
    12. Jordi Galé, 2010. "Monetary Policy and Unemployment," Working Papers 435, Barcelona Graduate School of Economics.
    13. Galí, Jordi, 2010. "Monetary Policy and Unemployment," Handbook of Monetary Economics,in: Benjamin M. Friedman & Michael Woodford (ed.), Handbook of Monetary Economics, edition 1, volume 3, chapter 10, pages 487-546 Elsevier.
    14. Konstantinos Theodoridis & Francesco Zanetti, 2016. "News shocks and labour market dynamics in matching models," Canadian Journal of Economics, Canadian Economics Association, vol. 49(3), pages 906-930, August.
    15. Kuester, Keith, 2010. "Real price and wage rigidities with matching frictions," Journal of Monetary Economics, Elsevier, vol. 57(4), pages 466-477, May.
    16. Maarten Dossche & Vivien Lewis & Céline Poilly, 2016. "Employment, Hours and the Welfare Effects of Intra-Firm Bargaining," AMSE Working Papers 1632, Aix-Marseille School of Economics, Marseille, France.
    17. Craighead, William D., 2014. "Monetary rules and sectoral unemployment in open economies," Journal of Macroeconomics, Elsevier, vol. 40(C), pages 277-292.
    18. Arnildo Da Silva Correa & Sergio Afonso Lago Alves, 2016. "A Tale Of Three Gaps: Unemployment, Capacity Utilization And Output," Anais do XLII Encontro Nacional de Economia [Proceedings of the 42nd Brazilian Economics Meeting] 031, ANPEC - Associação Nacional dos Centros de Pós-Graduação em Economia [Brazilian Association of Graduate Programs in Economics].
    19. Craighead, William, 2016. "Hysteresis in a New Keynesian Model," MPRA Paper 70777, University Library of Munich, Germany.
    20. Kilponen, Juha & Vanhala, Juuso, 2009. "Productivity and job flows : heterogeneity of new hires and continuing jobs in the business cycle," Research Discussion Papers 15/2009, Bank of Finland.
    21. Barnichon, Regis, 2010. "Productivity and unemployment over the business cycle," Journal of Monetary Economics, Elsevier, vol. 57(8), pages 1013-1025, November.
    22. Dossche, Maarten & Lewis, Vivien & Poilly, Céline, 2014. "Employment, hours and optimal monetary policy," Working Paper Series 1713, European Central Bank.
    23. Sveen, Tommy & Weinke, Lutz, 2009. "Inflation and labor market dynamics revisited," Journal of Monetary Economics, Elsevier, vol. 56(8), pages 1096-1100, November.
    24. Poilly, Céline & Wesselbaum, Dennis, 2014. "Evaluating labor market reforms: A normative analysis," Journal of Macroeconomics, Elsevier, vol. 39(PA), pages 156-170.

    More about this item

    Keywords

    search and matching; real rigidities; New Keynesian Phillips curve;

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • J40 - Labor and Demographic Economics - - Particular Labor Markets - - - General

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