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Search frictions, real rigidities and inflation dynamics

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Issue Date
2008
Physical description
43 p. : fórmulas, gráf., tab.
Abstract
I analyze the effect of search frictions on inflation dynamics, in a New Keynesian model where firms make both pricing and vacancy posting decisions. I find that search frictions create real rigidities in price setting. This mechanism flattens the New Keynesian Phillips curve, relative both to the standard model with a frictionless labor market and a model where pricing and vacancy posting decisions are made by different subsets of firms. This helps the model improve its empirical performance along a number of dimensions. First, inflation becomes more persistent. Second, output responses to monetary shocks become larger and more persistent. Finally, unemployment becomes more volatile
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Documentos de trabajo / Banco de España, 0806
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