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Inflation Dynamics and Marginal Costs: the Crucial Role of Hiring and Investment Frictions

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  • Eran Yashiv

    (Tel Aviv University)

  • Renato Faccini

    (Queen Mary, University of London)

Abstract

We embed convex hiring and investment costs and their interaction in a New Keynesian DSGE model with Nash wage bargaining. We explore the implications with respect to inflation dynamics. We estimate hiring frictions to explain about 60% of the variation in marginal costs, the labor share to explain around 30%, while the remaining 10% is accounted for by intrafirm bargaining. These results have been obtained with moderate total and marginal adjustment costs. Labor market frictions are thus far more important than the labor share in driving marginal costs at business cycle frequencies, in sharp contrast to results in the literature.

Suggested Citation

  • Eran Yashiv & Renato Faccini, 2014. "Inflation Dynamics and Marginal Costs: the Crucial Role of Hiring and Investment Frictions," 2014 Meeting Papers 178, Society for Economic Dynamics.
    • Handle: RePEc:red:sed014:178
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