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The Dynamics of Unemployment and Inflation in New Keynesian Models with Two Labor Margins
Author(s) -
CLERC PIERRICK
Publication year - 2021
Publication title -
journal of money, credit and banking
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.763
H-Index - 108
eISSN - 1538-4616
pISSN - 0022-2879
DOI - 10.1111/jmcb.12768
Subject(s) - economics , unemployment , new keynesian economics , wage , inflation (cosmology) , volatility (finance) , keynesian economics , replicate , full employment , price setting , macroeconomics , labour economics , econometrics , monetary policy , microeconomics , statistics , physics , mathematics , theoretical physics
New Keynesian models for which firms unilaterally adjust labor along both the intensive, and extensive margins usually fail to reproduce the volatility of unemployment. In this paper, we show that a marginal wage much more responsive than the average wage to shocks—in accordance with empirical observations—is a crucial mechanism allowing these models to replicate unemployment dynamics. At the same time, the large movements of the marginal wage are consistent with the low volatility of inflation as such movements induce strong strategic complementarities between price setters.