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The Role of Real Wage Rigidity and Labor Market Frictions for Inflation Persistence

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Abstract:

We analyze the transmission mechanism of wages to inflation within a New Keynesian business cycle model with wage rigidities and labor market frictions. Our main focus is on the channel of real wage rigidities on inflation persistence for which we find the specification of the wage bargaining process to be of crucial importance. Under the standard efficient Nash bargaining, the feedback of wage rigidities on inflation is ambiguous and depends on other labor market variables. However, under the alternative right-to-manage bargaining we find that more rigid wages translate directly into more persistent movements of aggregate inflation.

Keywords: E31; E32; E52; J64; inflation persistence; labor market search; matching models; monetary policy; real wage rigidity

Document Type: Research Article

DOI: https://doi.org/10.1111/j.1538-4616.2010.00348.x

Affiliations: 1: Kai Christoffel is at the European Central Bank (:  )., Email: Kai.Christoffel@ecb.europa.eu 2: Tobias Linzert is at the European Central Bank (:  )., Email: Tobias.Linzert@ecb.europa.eu

Publication date: 2010-10-01

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