IDEAS home Printed from https://ideas.repec.org/p/ecb/ecbwps/20091053.html
   My bibliography  Save this paper

Inflation dynamics with labour market matching: assessing alternative specifications

Author

Listed:
  • Christoffel, Kai
  • Costain, James
  • de Walque, Gregory
  • Kuester, Keith
  • Linzert, Tobias
  • Millard, Stephen
  • Pierrard, Olivier

Abstract

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 vs. 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 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. JEL Classification: E31, E32, E24, J64

Suggested Citation

  • 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," Working Paper Series 1053, European Central Bank.
  • Handle: RePEc:ecb:ecbwps:20091053
    Note: 85234
    as

    Download full text from publisher

    File URL: https://www.ecb.europa.eu//pub/pdf/scpwps/ecbwp1053.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Carlos Thomas, 2011. "Search Frictions, Real Rigidities, and Inflation Dynamics," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 43(6), pages 1131-1164, September.
    2. Gomes, Pedro, 2012. "Labour market flows: Facts from the United Kingdom," Labour Economics, Elsevier, vol. 19(2), pages 165-175.
    3. repec:wop:calsdi:97-23 is not listed on IDEAS
    4. Christopher A. Pissarides & Barbara Petrongolo, 2001. "Looking into the Black Box: A Survey of the Matching Function," Journal of Economic Literature, American Economic Association, vol. 39(2), pages 390-431, June.
    5. Philip Du Caju & Erwan Gautier & Daphne Momferatu & Melanie Ward-Warmedinger, 2009. "Institutional Features of Wage Bargaining in 23 European Countries, the US and Japan," Ekonomia, Cyprus Economic Society and University of Cyprus, vol. 12(2), pages 57-108, Winter.
    6. Mortensen, Dale T. & Pissarides, Christopher A., 1999. "Job reallocation, employment fluctuations and unemployment," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 18, pages 1171-1228, Elsevier.
    7. Faia, Ester, 2008. "Optimal monetary policy rules with labor market frictions," Journal of Economic Dynamics and Control, Elsevier, vol. 32(5), pages 1600-1621, May.
    8. Vincent Bodart & Gregory de Walque & Olivier Pierrard & Henri R. Sneessens & Raf Wouters, 2006. "Nominal wage rigidities in a new Keynesian model with frictional unemployment," Working Paper Research 97, National Bank of Belgium.
    9. Laurence Ball & David Romer, 1990. "Real Rigidities and the Non-Neutrality of Money," Review of Economic Studies, Oxford University Press, vol. 57(2), pages 183-203.
    10. Michiel Evers & Ruud de Mooij & Daniel van Vuuren, 2005. "What explains the variation in estimates of labour supply elasticities?," CPB Discussion Paper 51, CPB Netherlands Bureau for Economic Policy Analysis.
    11. Christoffel, Kai & Kuester, Keith & Linzert, Tobias, 2009. "The role of labor markets for euro area monetary policy," European Economic Review, Elsevier, vol. 53(8), pages 908-936, November.
    12. 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.
    13. Antonella Trigari, 2009. "Equilibrium Unemployment, Job Flows, and Inflation Dynamics," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 41(1), pages 1-33, February.
    14. 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.
    15. Garey Ramey & Wouter J. den Haan & Joel Watson, 2000. "Job Destruction and Propagation of Shocks," American Economic Review, American Economic Association, vol. 90(3), pages 482-498, June.
    16. Haefke, Christian & Sonntag, Marcus & van Rens, Thijs, 2013. "Wage rigidity and job creation," Journal of Monetary Economics, Elsevier, vol. 60(8), pages 887-899.
    17. Contini, Bruno & Revelli, Riccardo, 1997. "Gross flows vs. net flows in the labor market: What is there to be learned?," Labour Economics, Elsevier, vol. 4(3), pages 245-263, September.
    18. Mark Gertler & Antonella Trigari, 2009. "Unemployment Fluctuations with Staggered Nash Wage Bargaining," Journal of Political Economy, University of Chicago Press, vol. 117(1), pages 38-86, February.
    19. Carl E. Walsh, 2005. "Labor Market Search, Sticky Prices, and Interest Rate Policies," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 8(4), pages 829-849, October.
    20. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 2005. "Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy," Journal of Political Economy, University of Chicago Press, vol. 113(1), pages 1-45, February.
    21. Olivier Blanchard & Jordi Galí, 2007. "Real Wage Rigidities and the New Keynesian Model," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(s1), pages 35-65, February.
    22. Ben S. Bernanke & Jean Boivin & Piotr Eliasz, 2005. "Measuring the Effects of Monetary Policy: A Factor-Augmented Vector Autoregressive (FAVAR) Approach," The Quarterly Journal of Economics, Oxford University Press, vol. 120(1), pages 387-422.
    23. Erceg, Christopher J. & Henderson, Dale W. & Levin, Andrew T., 2000. "Optimal monetary policy with staggered wage and price contracts," Journal of Monetary Economics, Elsevier, vol. 46(2), pages 281-313, October.
    24. Luis J. Álvarez & Emmanuel Dhyne & Marco Hoeberichts & Claudia Kwapil & Hervé Le Bihan & Patrick Lünnemann & Fernando Martins & Roberto Sabbatini & Harald Stahl & Philip Vermeulen & Jouko Vilmunen, 2006. "Sticky Prices in the Euro Area: A Summary of New Micro-Evidence," Journal of the European Economic Association, MIT Press, vol. 4(2-3), pages 575-584, 04-05.
    25. Arthur M. Okun, 1973. "Upward Mobility in a High-Pressure Economy," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 4(1), pages 207-262.
    26. Christopher A. Pissarides, 2009. "The Unemployment Volatility Puzzle: Is Wage Stickiness the Answer?," Econometrica, Econometric Society, vol. 77(5), pages 1339-1369, September.
    27. Yashiv, Eran, 2006. "Evaluating the performance of the search and matching model," European Economic Review, Elsevier, vol. 50(4), pages 909-936, May.
    28. Zanetti, Francesco, 2011. "Labor market institutions and aggregate fluctuations in a search and matching model," European Economic Review, Elsevier, vol. 55(5), pages 644-658, June.
    29. Michel Normandin, 2006. "The Effects of Monetary-Policy Shocks on Real Wages: A Multi-Country Investigation The Effects of Monetary-Policy Shocks on Real Wages: A Multi-Country Investigationv," Cahiers de recherche 06-04, HEC Montréal, Institut d'économie appliquée.
    30. A. W. Phillips, 1958. "The Relation Between Unemployment and the Rate of Change of Money Wage Rates in the United Kingdom, 1861–1957," Economica, London School of Economics and Political Science, vol. 25(100), pages 283-299, November.
    31. Merz, Monika, 1995. "Search in the labor market and the real business cycle," Journal of Monetary Economics, Elsevier, vol. 36(2), pages 269-300, November.
    32. Angeloni,Ignazio & Kashyap,Anil K. & Mojon,Benoît (ed.), 2003. "Monetary Policy Transmission in the Euro Area," Cambridge Books, Cambridge University Press, number 9780521828642, October.
    33. Fujita, Shigeru & Ramey, Garey, 2007. "Job matching and propagation," Journal of Economic Dynamics and Control, Elsevier, vol. 31(11), pages 3671-3698, November.
    34. Massimiliano Marcellino & George Kapetanios, 2006. "The Role of Search Frictions and Bargaining for Inflation Dynamics," Working Papers 305, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
    35. Steven J. Davis & John Haltiwanger, 1998. "Measuring Gross Worker and Job Flows," NBER Chapters, in: Labor Statistics Measurement Issues, pages 77-122, National Bureau of Economic Research, Inc.
    36. Ravenna, Federico & Walsh, Carl E., 2008. "Vacancies, unemployment, and the Phillips curve," European Economic Review, Elsevier, vol. 52(8), pages 1494-1521, November.
    37. G. Peersman & R. Straub, 2006. "Putting the New Keynesian Model to a Test," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 06/375, Ghent University, Faculty of Economics and Business Administration.
    38. Krause, Michael U. & Lubik, Thomas A., 2006. "The cyclical upgrading of labor and on-the-job search," Labour Economics, Elsevier, vol. 13(4), pages 459-477, August.
    39. Mojon, Benoît & Peersman, Gert, 2001. "A VAR description of the effects of monetary policy in the individual countries of the euro area," Working Paper Series 92, European Central Bank.
    40. Burda, Michael & Wyplosz, Charles, 1994. "Gross worker and job flows in Europe," European Economic Review, Elsevier, vol. 38(6), pages 1287-1315, June.
    41. Mortensen, Dale & Pissarides, Christopher, 2011. "Job Creation and Job Destruction in the Theory of Unemployment," Ekonomicheskaya Politika / Economic Policy, Russian Presidential Academy of National Economy and Public Administration, vol. 1, pages 1-19.
    42. Keith Kuester, 2006. "Real Price and Wage Rigidities in a Model with Matching Frictions," 2006 Meeting Papers 546, Society for Economic Dynamics.
    43. Ignazio Angeloni & Anil K. Kashyap & Benoit Mojon & Daniele Terlizzese, 2003. "The Output Composition Puzzle: A Difference in the Monetary Transmission Mechanism in the Euro Area and U.S," NBER Working Papers 9985, National Bureau of Economic Research, Inc.
    44. Shigeru Fujita & Garey Ramey, 2009. "The Cyclicality Of Separation And Job Finding Rates," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 50(2), pages 415-430, May.
    45. Christoffel, Kai & Linzert, Tobias, 2005. "The role of real wage rigidity and labor market frictions for unemployment and inflation dynamics," Working Paper Series 556, European Central Bank.
    46. Robert Shimer, 2005. "The Cyclical Behavior of Equilibrium Unemployment and Vacancies," American Economic Review, American Economic Association, vol. 95(1), pages 25-49, March.
    47. Blanchard, Olivier & Galί, Jordi, 2006. "A New Keynesian Model with Unemployment," Kiel Working Papers 1335, Kiel Institute for the World Economy (IfW Kiel).
    48. Christoffel, Kai & Kuester, Keith, 2008. "Resuscitating the wage channel in models with unemployment fluctuations," Journal of Monetary Economics, Elsevier, vol. 55(5), pages 865-887, July.
    49. Hobijn, Bart & Sahin, Aysegül, 2009. "Job-finding and separation rates in the OECD," Economics Letters, Elsevier, vol. 104(3), pages 107-111, September.
    50. George A. Akerlof & Andrew K. Rose & Janet L. Yellen, 1988. "Job Switching and Job Satisfaction in the U.S. Labor Market," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 19(2), pages 495-594.
    51. 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.
    52. Ignazio Angeloni & Anil K Kashyap & Benoît Mojon & Daniele Terlizzese, 2004. "The Output Composition Puzzle: A Difference in the Monetary Transmission Mechanism in the Euro Area and the United States," Central Banking, Analysis, and Economic Policies Book Series, in: Luis Antonio Ahumada & J. Rodrigo Fuentes & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Se (ed.),Banking Market Structure and Monetary Policy, edition 1, volume 7, chapter 3, pages 059-120, Central Bank of Chile.
    53. Vincent Bodart & Olivier Pierrard & Henri R. Sneessens, 2005. "Calvo Wages in a Search Unemployment Model," DNB Working Papers 068, Netherlands Central Bank, Research Department.
    54. McCallum, Andrew & Smets, Frank, 2007. "Real wages and monetary policy transmission in the euro area," Kiel Working Papers 1360, Kiel Institute for the World Economy (IfW Kiel).
    55. Kashyap, Anil K. & Mojon, Benoît & Terlizzese, Daniele & Backé, Peter, 2002. "Monetary Transmission in the Euro Area : Where Do We Stand?," Working Paper Series 114, European Central Bank.
    56. Peter van Els & Alberto Locarno & Benoît Mojon & Julian Morgan, 2003. "New Macroeconomic Evidence on Monetary Policy Transmission in the Euro Area," Journal of the European Economic Association, MIT Press, vol. 1(2-3), pages 720-730, 04/05.
    57. Peersman, Gert & Smets, Frank, 2001. "The monetary transmission mechanism in the euro area: more evidence from VAR analysis," Working Paper Series 91, European Central Bank.
    58. 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, September.
    59. Robert E. Hall, 2005. "Employment Fluctuations with Equilibrium Wage Stickiness," American Economic Review, American Economic Association, vol. 95(1), pages 50-65, March.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Gregory De Walque & Olivier Pierrard & Henri Sneessens & Raf Wouters, 2009. "Sequential Bargaining in a Neo-Keynesian Model with Frictional Unemployment and Staggered Wage Negotiations," Annals of Economics and Statistics, GENES, issue 95-96, pages 223-250.
    2. Christoffel, Kai & Kuester, Keith & Linzert, Tobias, 2009. "The role of labor markets for euro area monetary policy," European Economic Review, Elsevier, vol. 53(8), pages 908-936, November.
    3. Lechthaler, Wolfgang & Merkl, Christian & Snower, Dennis J., 2010. "Monetary persistence and the labor market: A new perspective," Journal of Economic Dynamics and Control, Elsevier, vol. 34(5), pages 968-983, May.
    4. Federico Di Pace & Matthias Hertweck, 2019. "Labor Market Frictions, Monetary Policy, and Durable Goods," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 32, pages 274-304, April.
    5. Holt Richard, 2008. "Job Reallocation, Unemployment and Hours in a New Keynesian Model," The B.E. Journal of Macroeconomics, De Gruyter, vol. 8(1), pages 1-47, August.
    6. Thomas, Carlos, 2008. "Search and matching frictions and optimal monetary policy," Journal of Monetary Economics, Elsevier, vol. 55(5), pages 936-956, July.
    7. Carlos Thomas, 2011. "Search Frictions, Real Rigidities, and Inflation Dynamics," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 43(6), pages 1131-1164, September.
    8. Zanetti, Francesco, 2011. "Labor market institutions and aggregate fluctuations in a search and matching model," European Economic Review, Elsevier, vol. 55(5), pages 644-658, June.
    9. 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.
    10. Yashiv, Eran, 2007. "Labor search and matching in macroeconomics," European Economic Review, Elsevier, vol. 51(8), pages 1859-1895, November.
    11. Christoffel, Kai & Kuester, Keith, 2008. "Resuscitating the wage channel in models with unemployment fluctuations," Journal of Monetary Economics, Elsevier, vol. 55(5), pages 865-887, July.
    12. Josué Diwambuena & Raquel Fonseca & Stefan Schubert, 2021. "Italian Labour Frictions and Wage Rigidities in an Estimated DSGE," BEMPS - Bozen Economics & Management Paper Series BEMPS88, Faculty of Economics and Management at the Free University of Bozen.
    13. Kilponen, Juha & Vanhala, Juuso, 2009. "Productivity and job flows: heterogeneity of new hires and continuing jobs in the business cycle," Working Paper Series 1080, European Central Bank.
    14. Proaño, Christian R., 2012. "Gradual wage-price adjustments, labor market frictions and monetary policy rules," Journal of Economic Behavior & Organization, Elsevier, vol. 82(1), pages 220-235.
    15. 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.
    16. Federico Ravenna & Carl E. Walsh, 2011. "Welfare-Based Optimal Monetary Policy with Unemployment and Sticky Prices: A Linear-Quadratic Framework," American Economic Journal: Macroeconomics, American Economic Association, vol. 3(2), pages 130-162, April.
    17. Abo-Zaid, Salem, 2013. "Optimal monetary policy and downward nominal wage rigidity in frictional labor markets," Journal of Economic Dynamics and Control, Elsevier, vol. 37(1), pages 345-364.
    18. Kuester, Keith, 2010. "Real price and wage rigidities with matching frictions," Journal of Monetary Economics, Elsevier, vol. 57(4), pages 466-477, May.
    19. Krause, M.U. & Lubik, T.A., 2004. "On-the-job Search and the Cyclical Dynamics of the Labor Market," Other publications TiSEM 08a72137-ff72-4e18-add3-1, Tilburg University, School of Economics and Management.
    20. Chun-Hung Kuo & Hiroaki Miyamoto, 2016. "Unemployment and Wage Rigidity in Japan: A DSGE Model Perspective," Working Papers EMS_2016_06, Research Institute, International University of Japan.

    More about this item

    Keywords

    business cycle; inflation dynamics; labour market; real rigidities;
    All these keywords.

    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
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ecb:ecbwps:20091053. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Official Publications (email available below). General contact details of provider: https://edirc.repec.org/data/emieude.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.