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Real Price and Wage Rigidities in a Model with Matching Frictions

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  • Keith Kuester
  • Goethe University

Abstract

I reconcile macro- and micro-evidence on price setting in a search and matching framework. Search frictions lead price-setting firms to negotiate wage rates with their employees. In contrast to the existing macro-labor literature, I assume that wage-bargaining and price-setting occur in the same sector. The degree of strategic complementarity of price-setting thus increases, leading to substantial real price rigidities which in turn reduce implied price durations. At the same time this mechanism dampens the reaction of real wage rates to aggregate fluctuations which is necessary to explain the highly volatile response of vacancies in the data. A further 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. I demonstrate that the modified model fits impulse responses to monetary policy shocks obtained from a structural VAR for post Volcker-disinflation U.S. data very well.

Suggested Citation

  • Keith Kuester & Goethe University, 2006. "Real Price and Wage Rigidities in a Model with Matching Frictions," Computing in Economics and Finance 2006 152, Society for Computational Economics.
  • Handle: RePEc:sce:scecfa:152
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Vincent Bodart & Gregory de Walque & Olivier Pierrard & Henri R. Sneessens & Raf Wouters, 2006. "Nominal wage rigidities in a new Keynesian model with frictional unemployment," Working Paper Research 97, National Bank of Belgium.
    2. Van Zandweghe, Willem, 2010. "On-the-job search, sticky prices, and persistence," Journal of Economic Dynamics and Control, Elsevier, pages 437-455.
    3. Christoffel, Kai & Kuester, Keith & Linzert, Tobias, 2006. "Identifying the role of labor markets for monetary policy in an estimated DSGE model," CFS Working Paper Series 2007/07, Center for Financial Studies (CFS).
    4. Christoffel, Kai & Costain, James & de Walque, Gregory & Kuester, Keith & Linzert, Tobias & Millard, Stephen & Pierrard, Olivier, 2009. "Inflation dynamics with labour market matching: assessing alternative specifications," Bank of England working papers 375, Bank of England.
    5. Jordi Galé, 2010. "Monetary Policy and Unemployment," Working Papers 435, Barcelona Graduate School of Economics.
    6. Galí, Jordi, 2010. "Monetary Policy and Unemployment," Handbook of Monetary Economics,in: Benjamin M. Friedman & Michael Woodford (ed.), Handbook of Monetary Economics, edition 1, volume 3, chapter 10, pages 487-546 Elsevier.
    7. Linzert, Tobias & Christoffel, Kai & Kuester, Keith, 2006. "Identifying the role of labor markets for monetary policy in an estimated DSGE model," Working Paper Series 635, European Central Bank.

    More about this item

    Keywords

    firm-specific labor; real rigidities; Phillips curve; wage rigidity; bargaining.;

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • J63 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Turnover; Vacancies; Layoffs

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