Inflation dynamics with labour market matching: assessing alternative specifications. NBB Working Papers. No. 164, May 19, 2009

Christoffel, Kai and Costain, James and Walque, Gregory de and Kuester, Keith and Linzert, Tobias and Millard, Stephen and Pierrard, Olivier. (2009) Inflation dynamics with labour market matching: assessing alternative specifications. NBB Working Papers. No. 164, May 19, 2009 .

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 behaviour. 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.