Inflation Dynamics with Search Frictions: A Structural Econometric Analysis

54 Pages Posted: 12 Jun 2008

See all articles by Michael U. Krause

Michael U. Krause

University of Cologne

J. David López-Salido

Board of Governors of the Federal Reserve System

Thomas A. Lubik

Johns Hopkins University - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: April 2008

Abstract

The New Keynesian Phillips curve explains inflation dynamics as being driven by current and expected future real marginal costs. In competitive labour markets, the labour share can serve as a proxy for the latter. In this paper, we study the role of real marginal cost components implied by search frictions in the labour market. We construct a measure of real marginal costs by using newly available labour market data on worker finding rates. Over the business cycle, the measure is highly correlated with the labour share. Estimates of the Phillips curve using GMM reveal that the marginal cost measure remains significant, and that inflation dynamics are mainly driven by the forward-looking component. Bayesian estimation of the full New Keynesian model with search frictions helps us disentangle which shocks are driving the economy to generate the observed unit labour cost dynamics. We find that mark-up shocks are the dominant force in labour market fluctuations.

Keywords: Bayesian estimation, labour market frictions, marginal costs, Phillips curve

JEL Classification: E24, E32, J64

Suggested Citation

Krause, Michael U. and López-Salido, J. David and Lubik, Thomas A., Inflation Dynamics with Search Frictions: A Structural Econometric Analysis (April 2008). , Vol. , pp. -, 2008. Available at SSRN: https://ssrn.com/abstract=1143173

Michael U. Krause (Contact Author)

University of Cologne ( email )

Albertus-Magnus-Platz
Cologne, 50923
Germany

J. David López-Salido

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Thomas A. Lubik

Johns Hopkins University - Department of Economics ( email )

3400 Charles Street
Baltimore, MD 21218-2685
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
3
Abstract Views
367
PlumX Metrics