Kiel Working Papers, Kiel Institute for World Economics
No 1362:
Vacancies, Unemployment, and the Phillips Curve
Federico Ravenna and Carl E. Walsh
Abstract: The canonical new Keynesian Phillips Curve has become a
standard component of models designed for monetary policy analysis.
However, in the basic new Keynesian model, there is no unemployment, all
variation in labor input occurs along the intensive hours margin, and the
driving variable for inflation depends on workers’ marginal rates of
substitution between leisure and consumption. In this paper, we incorporate
a theory of unemployment into the new Keynesian theory of inflation and
empirically test its implications for inflation dynamics. We show how a
traditional Phillips curve linking inflation and unemployment can be
derived and how the elasticity of inflation with respect to unemployment
depends on structural characteristics of the labor market such as the
matching technology that pairs vacancies with unemployed workers. We
estimate on US data the Phillips curve generated by the model, and derive
the implied marginal cost measure driving inflation dynamics.
JEL-Codes: E52,; E58,; J64; (follow links to similar papers)
41 pages, June 2007
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