Along the New Keynesian Phillips curve with nominal and real rigidities (original) (raw)

The New Keynesian Phillips Curve: From Sticky Inflation to Sticky Prices

Journal of Money, Credit and Banking, 2008

The New Keynesian Phillips Curve model of inflation dynamics based on forward-looking expectations is of great theoretical significance in monetary policy analysis. Empirical studies, however, often find that backward-looking inflation inertia dominates the dynamics of the short-run aggregate supply curve. This inconsistency is examined by investigating multiple structural changes in the NKPC for the US between 1960 and 2005, employing both inflation expectations survey data and a rational expectations approximation. We find that forward-looking behavior plays a smaller role during the high and volatile inflation regime to 1981 than in the subsequent period of moderate inflation, providing empirical support for sticky price models over the last two decades. A break in the intercept of the NKPC is also identified around 2001 and this may be associated with US monetary policy in that period.

Labor Market Search, Sticky Prices, and Interest Rate Policies

Social Science Research Network, 2003

In this paper, a simple search model of the labor market is combined with sticky prices to investigate the dynamic response of the economy to nominal interest rate shocks. The framework allows the respective roles of labor market search, nominal price rigidities, and policy inertia in accounting for the impact of monetary policy shocks to be studied. Labor market rigidities introduced by the process of matching job seekers with job vacancies amplify the real impact and reduce the inflation impact of a monetary policy shock. As a result, significantly less price rigidity is required; for example, the dynamic response of output and inflation in the new Keynesian model with a Walrasian labor market and only 15% of firms optimally adjusting prices each period can be replicated in the labor market search model when a more realistic 50% of firms optimally adjust their price each period.

The Elusive Persistence: Wage and Price Rigidities, the Phillips Curve, and Inflation Dynamics

2007

We review the main New Keynesian inflation equations that have arisen as a result of aggregation from individual firms' price rigidities. We find that, on the whole, they cannot account for inflation persistence, a key feature of the empirical dynamics of inflation, and with important policy implications. The only exception seems to be when price stickiness is combined with wage rigidity and staggering.

Labor market search, nominal rigidities and monetary propagation

Hitotsubashi journal of economics, 2006

Business cycle models with nominal rigidities do not readily generate persistent and hump shaped aggregate output dynamics to monetary shocks. In this paper, we consider labor market search in models with nomial rigidities to obtain realistic monetary propagation. While existing research combined labor market search with nominal price stickiness, greater persistence and hump shaped output dynamics as well as plausible labor market movements are obtained when labor market search is combined with nominal wage stickiness rather than nominal price stickiness.

Nominal Wage Rigidities in a New Keynesian Model with Frictional Unemployment

2006

In this paper, we propose a search and matching model with nominal stickiness à la Calvo in the wage bargaining. We analyze the properties of the model, first, in the context of a typical real business cycle model driven by stochastic productivity shocks and second, in a fully specified monetary DSGE model with various real and nominal rigidities and multiple

Job Destruction, Price Stickiness, and the Propagation of Monetary Policy Shocks

2000

Dynamic general equilibrium models in which the capital stock and lagged prices are state variables and the labor market is Walrasian have di¢culty matching the hump shaped response of real variables to monetary policy shocks that is observed in the data. Previous work by , Andolfatto (1997), and den Haan, suggests that a search theoretic model of the labor market allows non-monetary RBC models to better match important aspects of U.S. economic ‡uctuations. In this paper, a simple search theoretic labor market is combined with a cash-in-advance model of a monetary economy with sticky price adjustment. Changes in the nominal rate of interest alter the job destruction margin and generate a hump shaped response of employment to interest rate shocks. . I would like to thank Alina Carara for helpful comments, and seminar participants at UC Davis for very useful comments on an earlier version of this paper which incorporated a cash-in-advance constraint into a labor search model but which assumed ‡exible prices. This draft is still very preliminary and incomplete: please do not quote, comments welcome.

Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy

We present a model embodying moderate amounts of nominal rigidities that accounts for the observed inertia in inflation and persistence in output. The key features of our model are those that prevent a sharp rise in marginal costs after an expansionary shock to monetary policy. Of these features, the most important are staggered wage contracts that have an average duration of three quarters and variable capital utilization.