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Do Search Frictions Matter for Inflation Dynamics?

  • Michael U. Krause
  • David J. Lopez-Salido
  • Thomas Lubik

We assess the empirical relevance for inflation dynamics of accounting for the presence of search frictions in the labor market. The New Keynesian Phillips curve explains inflation dynamics as being mainly driven by current and expected future marginal costs. Recent empirical research has emphasized different measures of real marginal costs to be consistent with observed inflation persistence. We argue that, allowing for search frictions in the labor market, real marginal cost should also incorporate the cost of generating and maintaining long-term employment relationships, along with conventional measures, such as real unit labor costs. In order to construct a synthetic measure of real marginal costs, we use newly available labor market data on worker finding and separation rates that reflect firing and hiring costs to the firm. We then estimate a New Keynesian Phillips curve using structural econometric techniques.

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Paper provided by Kiel Institute for the World Economy in its series Kiel Working Papers with number 1353.

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Length: 26 pages
Date of creation: Jun 2007
Handle: RePEc:kie:kieliw:1353
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  12. Claudio Michelacci & David Lopez-Salido, 2004. "Technology Shocks And Job Flows," Working Papers wp2004_05, CEMFI.
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  25. Christopher A. Pissarides, 2000. "Equilibrium Unemployment Theory, 2nd Edition," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262161877.
  26. Krause, Michael & Lubik, Thomas A., 2007. "Does intra-firm bargaining matter for business cycle dynamics?," Discussion Paper Series 1: Economic Studies 2007,17, Deutsche Bundesbank, Research Centre.
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