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The Impact of Labor Markets on the Transmission of Monetary Policy in an Estimated DSGE Model

  • Christoffel, Kai


    (European Central Bank)

  • Kuester, Keith


    (Goethe University Frankfurt)

  • Linzert, Tobias


    (European Central Bank)

Real wages are a key determinant of marginal costs. The latter themselves are a driving force of inflation. We ask how wages and labor market shocks feed into the inflation process. We model search and matching frictions in the labour market in an otherwise standard New-Keynesian closed economy DSGE model. We estimate the model using Bayesian techniques for German data from the mid 70s to present. In our framework, we find that labor market structure is important for the evolution of the business cycle, and for monetary policy in particular. Yet labor market shocks are not important information for the conduct of stabilization policy.

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Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 1902.

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Length: 60 pages
Date of creation: Dec 2005
Date of revision:
Handle: RePEc:iza:izadps:dp1902
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