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Search frictions, real rigidities and inflation dynamics

Thomas, Carlos (2007) Search frictions, real rigidities and inflation dynamics. CEPDP, 822. Centre for Economic Performance, London School of Economics and Political Science, London, UK. ISBN 9780853280828

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Identification Number: 822

Abstract

The standard New Keynesian model suffers from the so-called .macro-micro pricing conflict: in order to match the dynamics of inflation implied by macroeconomic data, the model needs to assume an average duration of price contracts which is much longer than what is observed in micro data. Here I show how departing from the standard model’s assumption of a perfectly competitive labor market can help resolve the pricing conflict. I do so by assuming search frictions in the labor market. In this framework, labor becomes firm-specific and marginal cost curves become upward-sloping. This mechanism reduces the slope of the New Keynesian Phillips curve given a frequency of price adjustment. Conversely, given an estimate of this slope, my model implies shorter price durations than the standard model. For a plausible calibration and for different slope values, my model consistently delivers price durations that are roughly half of those implied by the standard model.

Item Type: Monograph (Discussion Paper)
Official URL: http://cep.lse.ac.uk
Additional Information: © 2007 Carlos Thomas
Subjects: H Social Sciences > HG Finance
H Social Sciences > HD Industries. Land use. Labor
JEL classification: E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E32 - Business Fluctuations; Cycles
E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E52 - Monetary Policy (Targets, Instruments, and Effects)
J - Labor and Demographic Economics > J4 - Particular Labor Markets > J40 - General
Sets: Collections > Economists Online
Research centres and groups > Centre for Economic Performance (CEP)
Date Deposited: 19 Jul 2008 12:02
Last Modified: 01 Oct 2010 09:12
URI: http://eprints.lse.ac.uk/id/eprint/19692

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