Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/17880
Authors: 
Sveen, Tommy
Weinke, Lutz
Year of Publication: 
2007
Series/Report no.: 
Kiel Working Paper 1368
Abstract: 
Firms adjust labor both at the intensive and at the extensive margin (see, e.g., Hansen and Sargent 1988). Moreover, employment adjustment is not frictionless (see, e.g., Mortensen and Pissarides 1994). What does this imply for inflation dynamics? To address this question we develop a New Keynesian model featuring two margins of labor adjustment as well as a simultaneous price-setting and employment decision at the firm level. We find that the presence of an empirically plausible labor adjustment decision at the firm level rationalizes strategic complementarities in price-setting which help explain inflation dynamics.
Document Type: 
Working Paper

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