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

39 Pages Posted: 5 Dec 2005

See all articles by Kai Philipp Christoffel

Kai Philipp Christoffel

European Central Bank (ECB)

Tobias Linzert

European Central Bank (ECB); IZA Institute of Labor Economics

Multiple version iconThere are 2 versions of this paper

Date Written: November 2005

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.

Keywords: Monetary Policy, Matching Models, Labor Market Search, Inflation Persistence, Real Wage Rigidity

JEL Classification: E52, J64, E32, E31

Suggested Citation

Christoffel, Kai Philipp and Linzert, Tobias, The Role of Real Wage Rigidity and Labor Market Frictions for Unemployment and Inflation Dynamics (November 2005). ECB Working Paper No. 556, IZA Discussion Paper No. 1896, Available at SSRN: https://ssrn.com/abstract=850884

Kai Philipp Christoffel (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Tobias Linzert

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

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