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

CentER Discussion Paper No. 2003-113

44 Pages Posted: 23 Jul 2004

See all articles by Michael U. Krause

Michael U. Krause

University of Cologne

Thomas A. Lubik

Johns Hopkins University - Department of Economics

Date Written: 2003

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.

Keywords: Labor market, real wage, search and matching, new Keynesian model, beveridge curve

JEL Classification: E24, E32, J64

Suggested Citation

Krause, Michael U. and Lubik, Thomas A., The (Ir)Relevance of Real Wage Rigidity in the New Keynesian Model with Search Frictions (2003). CentER Discussion Paper No. 2003-113. Available at SSRN: https://ssrn.com/abstract=556937 or http://dx.doi.org/10.2139/ssrn.556937

Michael U. Krause (Contact Author)

University of Cologne ( email )

Albertus-Magnus-Platz
Cologne, 50923
Germany

Thomas A. Lubik

Johns Hopkins University - Department of Economics ( email )

3400 Charles Street
Baltimore, MD 21218-2685
United States

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