The Role of Real Wage Rigidity and Labor Market Frictions for Unemployment and Inflation Dynamics

By K. Christoffel, Tobias Linzert. Social Science Research Network, 2005

184 citations recorded by the source corpus.

In this paper we incorporate a labor market with matching frictions and wage rigidities into the New Keynesian business cycle model. In particular, we analyze the effect of a monetary policy shock and investigate how labor market frictions affect the transmission process of monetary policy. The model allows real wage rigidities to interact with adjustments in employment and hours affecting inflation dynamics via marginal costs. We find that the response of unemployment and inflation to an interest rate innovation depends on the degree of wage rigidity. Generally, more rigid wages translate into more persistent movements of aggregate inflation. Moreover, the impact of a monetary policy shock on unemployment and inflation depends also on labor market fundamentals such as bargaining power and the flows in and out of employment.

Subfields: Economics and Econometrics

View Paper: https://www.semanticscholar.org/paper/43a1f4be7fee6dba1d4617a5dcc64967d949e16f

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In Economics and Econometrics

Citations in the corpus

Optimal Central Bank Transparency (2008, unknown): “By modifying a New Keynesian business cycle model (by including a labor market with matching frictions and rigid wages), Christoffel and Linzert (2005) show that the more rigid wages are the more persistent in ﬂ ation is.”
The Role of Labor Markets for Euro Area Monetary Policy (2009, unknown): “One can show that in this case a direct channel from wages to inflation exists, so that the level of hourly wages and their stickiness play a direct role for inflation dynamics; see, e.g., Trigari (2006) and Christoffel and Linzert (2005).”
Nominal Wage Rigidities in a New Keynesian Model with Frictional Unemployment (2006, unknown): “2 The integration of wage rigidities and nominal price stickiness in the labor-search models has been analyzed by Krause and Lubik (2005), Christoffel and Linzert (2004), Blanchard and Gali (2005) and Christoffel, Kuster, and Linzert (2006).”
Search and matching frictions and optimal monetary policy (2008, background): “From the aggregate resource constraint, equation (13), price dispersion t increases the amount of resources needed produce a certain amount of the consumption basket, ct.”
Resuscitating the Wage Channel in Models with Unemployment Fluctuations (2008, methodology): “As Trigari (2006) and Christoffel and Linzert (2005) have shown, this is the case under RTM.6 Direct means that wages do not need to work through employment first to cause a reaction of inflation.”
Inflation Dynamics with Search Frictions: A Structural Econometric Analysis (2008, background): “njt = (1− ρ) [njt−1 + vjt−1q(θt−1)] , (5)”