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Inflation dynamics with labour market matching: assessing alternative specifications

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

This paper reviews recent approaches to modeling the labour market and assesses their implications for inflation dynamics through both their effect on marginal cost and on price-setting behavior. In a search and matching environment, we consider the following modeling setups: 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.

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Paper provided by Federal Reserve Bank of Philadelphia in its series Working Papers with number 09-6.

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Date of creation: 2009
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Handle: RePEc:fip:fedpwp:09-6
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