Inflation dynamics with labour market matching: assessing alternative specifications

This paper reviews recent approaches to modeling the labour market and assessestheir implications for ination dynamics through both their e¤ect on marginalcost and on price-setting behaviour. In a search and matching environment, weconsider the following modeling setups: right-to-manage bargaining vs. e¢ cientbargaining, wage stickiness in new and existing matches, interactions at the rmlevel between price and wage-setting, alternative forms of hiring frictions, searchon-the-job and endogenous job separation. We nd that most specicationsimply too little real rigidity and, so, too volatile...

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Year of publication:	2009-05-15
Authors:	Christoffel, Kai ; Costain, James S. ; De Walque, Gregory ; Küster, Keith ; Linzert, Tobias ; Millard, Stephen G. ; Pierrard, Olivier
Institutions:	European Central Bank
Published in:	Working papers published in 2009 ECB Working Paper Series No 1053, May 2009
Subject:	Arbeitsmarkt \| Labour Market \| Inflation \| Konjunkturzyklus

Abstract
Non-technical summary
1 Introduction and motivation
2 The baseline model
2.1 Households, consumption and saving
2.2 Firms
2.3 The labour market
2.4 Wage bargaining
2.5 Vacancy posting
2.6 Monetary policy, fi scal policyand market clearing
3 Stylised facts and the baseline economy
3.1 Calibration of the model economies
3.2 Stylised facts – the transmissionof monetary policy
3.3 Effects of a monetary policyshock in the baseline
4 Right-to-manage bargaining
5 Wage rigidity
5.1 Effi cient bargaining
5.2 Right-to-manage bargaining
6 Real rigidities arising within theindividual fi rm
7 Contemporaneous hiring
8 Variants of the vacancy posting process
8.1 Employment adjustment costs convexin the hiring rate
8.2 Vacancy costs as sunk costs
9 On-the-job search
10 Endogenous job destruction
v11 Conclusions
References
Appendix
European Central Bank Working Paper Series

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