The (Ir)relevance of Real Wage Rigidity in the New Keynesian Model with Search Frictions

M.U. Krause, T.A. Lubik

Research output: Working paperDiscussion paperOther research output

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Abstract

We explore the role of real wage dynamics in a New Keynesian business cycle model with search and matching frictions in the labor market.Both job creation and destruction are endogenous.We show that the model generates counterfactual inflation and labor market dynamics.In particular, it fails to generate a Beveridge curve: vacancies and unemployment are positively correlated. Introducing real wage rigidity leads to a negative correlation, and increases the magnitude of labor market flows to more realistic values.However, inflation dynamics are only weakly affected by real wage rigidity.This is because of the presence of labor market frictions, which generate long-run employment relationships.The measure of real marginal cost that is relevant for inflation dynamics via the Phillips curve contains a dynamic component that does not necessarily move with real wages.
Original languageEnglish
Place of PublicationTilburg
PublisherMacroeconomics
Number of pages44
Volume2003-113
Publication statusPublished - 2003

Publication series

NameCentER Discussion Paper
Volume2003-113

Fingerprint

New Keynesian model
Search frictions
Real wages
Real wage rigidity
Inflation dynamics
Matching frictions
Unemployment
Vacancy
Labor market frictions
Search and matching
Phillips curve
Wage dynamics
Business cycle model
Beveridge curve
Inflation
New Keynesian
Real marginal cost
Labor market dynamics
Job creation
Job destruction

Keywords

  • wages
  • labour market
  • matching

Cite this

Krause, M. U., & Lubik, T. A. (2003). The (Ir)relevance of Real Wage Rigidity in the New Keynesian Model with Search Frictions. (CentER Discussion Paper; Vol. 2003-113). Tilburg: Macroeconomics.
Krause, M.U. ; Lubik, T.A. / The (Ir)relevance of Real Wage Rigidity in the New Keynesian Model with Search Frictions. Tilburg : Macroeconomics, 2003. (CentER Discussion Paper).
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Krause, MU & Lubik, TA 2003 'The (Ir)relevance of Real Wage Rigidity in the New Keynesian Model with Search Frictions' CentER Discussion Paper, vol. 2003-113, Macroeconomics, Tilburg.

The (Ir)relevance of Real Wage Rigidity in the New Keynesian Model with Search Frictions. / Krause, M.U.; Lubik, T.A.

Tilburg : Macroeconomics, 2003. (CentER Discussion Paper; Vol. 2003-113).

Research output: Working paperDiscussion paperOther research output

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AB - We explore the role of real wage dynamics in a New Keynesian business cycle model with search and matching frictions in the labor market.Both job creation and destruction are endogenous.We show that the model generates counterfactual inflation and labor market dynamics.In particular, it fails to generate a Beveridge curve: vacancies and unemployment are positively correlated. Introducing real wage rigidity leads to a negative correlation, and increases the magnitude of labor market flows to more realistic values.However, inflation dynamics are only weakly affected by real wage rigidity.This is because of the presence of labor market frictions, which generate long-run employment relationships.The measure of real marginal cost that is relevant for inflation dynamics via the Phillips curve contains a dynamic component that does not necessarily move with real wages.

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Krause MU, Lubik TA. The (Ir)relevance of Real Wage Rigidity in the New Keynesian Model with Search Frictions. Tilburg: Macroeconomics. 2003. (CentER Discussion Paper).