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Inflation dynamics with labour market matching: assessing alternative specifications

  • Christoffel, Kai

    ()

    (European Central Bank)

  • Costain, James

    ()

    (Banco de Espana)

  • de Walque, Gregory

    ()

    (National Bank of Belgium)

  • Kuester, Keith

    ()

    (Federal Reserve Bank of Philadelphia)

  • Linzert, Tobias

    ()

    (European Central Bank)

  • Millard, Stephen

    ()

    (Bank of England)

  • Pierrard, Olivier

    ()

    (Banque Centrale du Luxembourg)

This paper reviews recent approaches to modelling the labour market, and assesses their implications for inflation dynamics through both their effect on marginal cost and on price-setting behaviour. In a search and matching environment, we consider the following modelling set-ups: right-to-manage bargaining versus efficient bargaining, wage stickiness in new and existing matches, interactions at the firm level between price and wage-setting, alternative forms of hiring frictions, search on-the-job and endogenous job separation. We find that most specifications imply too little real rigidity relative to the data and, so, too volatile inflation. Models with wage stickiness and right-to-manage bargaining, or with firm-specific labour emerge as the most promising candidates.

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Paper provided by Bank of England in its series Bank of England working papers with number 375.

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Length: 53 pages
Date of creation: 24 Aug 2009
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Handle: RePEc:boe:boeewp:0375
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