The Role of Search Frictions and Bargaining for Inflation Dynamics

IGIER Working Paper No. 304

36 Pages Posted: 1 Mar 2006

See all articles by Antonella Trigari

Antonella Trigari

Bocconi University - Department of Economics

Date Written: February 2006

Abstract

This paper develops a dynamic general equilibrium model that integrates labor market search and matching into an otherwise standard New Keynesian model. I allow for changes of the labor input at both the extensive and the intensive margin and develop two alternative specifications of the bargaining process. Under efficient bargaining (EB) hours are determined jointly by the firm and the worker as a part of the same Nash bargain that determines wages. With right to manage (RTM), instead, firms retain the right to set hours of work unilaterally. I show that introducing search and matching frictions affects the cyclical behavior of real marginal costs by way of two different channels: a wage channel under RTM and an extensive margin channel under EB. In both cases, the presence of search and matching frictions may cause a lower elasticity of marginal costs with respect to output and thus help to account for the observed inertia in inflation.

Keywords: Labor Market Search, Wage Bargaining, Business Cycles

JEL Classification: E52, J64, E24, E32, E31

Suggested Citation

Trigari, Antonella, The Role of Search Frictions and Bargaining for Inflation Dynamics (February 2006). IGIER Working Paper No. 304, Available at SSRN: https://ssrn.com/abstract=886021 or http://dx.doi.org/10.2139/ssrn.886021

Antonella Trigari (Contact Author)

Bocconi University - Department of Economics ( email )

Via Gobbi 5
Milan, 20136
Italy

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