Inflation dynamics with labour market matching: assessing alternative specifications

Christoffel, Kai; Costain, James; Kuester, Keith; Linzert, Tobias; Millard, Stephen; Pierrard, Olivier

Working Paper

Inflation dynamics with labour market matching: assessing alternative specifications

Abstract: This paper reviews recent approaches to modeling the labour market and assesses their implications for inflation dynamics through both their effect on marginal cost and on price-setting behavior. In a search and matching environment, we consider the following modeling setups: right-to-manage bargaining vs. efficient bargaining, wage stickiness in new and existing matches, interactions at the firm level between price and wage-setting, alternative forms of hiring frictions, search on-the-job and endogenous job separation. We find that most specifications imply too little real rigidity and, so, too volatile inflation. Models with wage stickiness and right-to-manage bargaining or with firm-specific labour emerge as the most promising candidates.

Keywords: Labor market; Business cycles;