Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/71994
Authors: 
Krause, Michael U.
Lubik, Thomas A.
Year of Publication: 
2003
Series/Report no.: 
Working Papers, The Johns Hopkins University, Department of Economics 504
Abstract: 
We explore the role of real wage dynamics in a New Keynesian business cycle model with search and matching frictions in the labor market. Both job creation and destruction are endogenous. We show that the model generates counterfactual inflation and labor market dynamics. In particular, it fails to generate a Beveridge curve: vacancies and unemployment are positively correlated. Introducing real wage rigidity leads to a negative correlation, and increases the magnitude of labor market flows to more realistic values. However, inflation dynamics are only weakly affected by real wage rigidity. This is because of the presence of labor market frictions, which generate long-run employment relationships. The measure of real marginal cost that is relevant for inflation dynamics via the Phillips curve contains a dynamic component that does not necessarily move with real wages.
Subjects: 
Labor Market
Real Wage
Search and Matching
New Keynesian Model
Beveridge Curve
JEL: 
E24
E32
J64
Document Type: 
Working Paper

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