Kiel Working Papers, Kiel Institute for World Economics
No 1495:
The Inflation-Output Tradeoff: Which Type of Labor Market Rigidity Is to Be Blamed?
Christian Merkl
Abstract: In the standard New Keynesian sticky price model the
central bank faces no contradiction between the stabilization of inflation
and the stabilization of the welfare relevant output gap after a
productivity shock hits the economy. When the standard model is enhanced by
real wage rigidities or labor turnover costs, an endogenous short-run
inflation-output tradeoff arises. This paper compares the implications of
the two labor market rigidities. It argues that economists and policymakers
alike should pay more attention to labor turnover costs for the following
reasons. First, a model with labor turnover costs generates impulse
response functions that are more in line with the empirical evidence than
those of a model with real wage rigidities. Second, labor turnover costs
are the dominant source for the inflation-output tradeoff when both
rigidities are present in the model. And finally, there is stronger
empirical evidence for the existence of labor turnover costs than for real
wage rigidities
Keywords: monetary policy, real wage rigidity, labor turnover costs, unemployment, tradeoff; (follow links to similar papers)
JEL-Codes: E24,; E32,; E52,; J23; (follow links to similar papers)
18 pages, March 2009
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