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Title:The role of real wage rigidity and labor market frictions for unemployment and inflation dynamics PDF Logo
Authors:Christoffel, Kai
Linzert, Tobias
Issue Date:2005
Series/Report no.:IZA Discussion Papers 1896
Abstract: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.
Subjects:monetary policy
matching models
labor market search
inflation persistence
real wage rigidity
JEL:E52
J64
E32
E31
Document Type:Working Paper
Appears in Collections:IZA Discussion Papers, Forschungsinstitut zur Zukunft der Arbeit (IZA)

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