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Gradual wage-price adjustments, labor market frictions and monetary policy rules

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  • Christian R. Proaño

    (Department of Economics, New School for Social Research)

Abstract

Contrary to the assumption of perfectly flexible labour markets commonly used in mainstream macroeconomic models, in the real world the existence of structural imperfections such as search and trading costs hinder the frictionless functioning of these markets, generally leading to outcomes of Non-Walrasian type with involuntary unemployment and open vacancies in "equilibrium". In this paper the author models the existence of labour market frictions into a Keynesian (Disequilibrium) AS-AD framework in the line of Asada, Chen, Chiarella and Flaschel (2006) through a labour search and matching function. By means of dynamic shock simulations, the author finds that the extent of the labour market rigidity has a great importance for the dynamics not only of employment and output, but also of wage and price inflation, and consequently also for the conduction of monetary policy.
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  • Christian R. Proaño, 2011. "Gradual wage-price adjustments, labor market frictions and monetary policy rules," Working Papers 1112, New School for Social Research, Department of Economics.
    • Handle: RePEc:new:wpaper:1112
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    More about this item

    Keywords

    Labor market frictions; wage and price inflation; (D)AS-AD; monetary policy;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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