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Real Price and Wage Rigidities in a Model with Matching Frictions

  • Keith Kuester

I reconcile macro- and micro-evidence on price-setting in a search and matching framework. Negotiation of wages substantially increases strategic complementarity of price-setting and thus real price rigidities which reduces implied price durations. This mechanism also dampens wage responses to shocks which is necessary to explain the highly volatile vacancy response in the data. Another interesting finding is that inflation via the Phillips curve is not only driven by an output gap but also by an employment gap – a feature usually neglected in empirical research. The modified model matches impulse responses of an SVAR for post Volcker-disinflation U.S. data very well

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Paper provided by Society for Economic Dynamics in its series 2006 Meeting Papers with number 546.

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Date of creation: 03 Dec 2006
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Handle: RePEc:red:sed006:546
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Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA

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