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Labor Markets, Economic Fluctuations, and Monetary Policy

Objective

The New Keynesian (NK) model has emerged in recent years as the workhorse for monetary policy analysis. The first part of the proposed project is motivated by two shortcomings of that framework: (i) the lack of an explicit analysis of unemployment and its potential role in the design of policy, (ii) the limited empirical support for the model s wage-setting block. One of the objectives of the proposed project is the assessment of the empirical relevance of the specification of the wage-setting bock found in standard versions of the NK model, with a special focus on their implied wage-unemployment dynamics. As part of my project, I will show how the standard NK model with staggered wage setting implies a relationship between wage inflation and unemployment that fails to capture important features of the data. I also plan to develop and study an extension of the NK model that incorporates in a tractable way real wage rigidities (coexisting with nominal rigidities), with the objective of (i) assessing their relative role in explaining the observed patterns of wages and unemployment, (ii) analyzing their implications for the design of monetary policy. The second part of the project is motivated by the significant changes in the co-movements among some key macro variables that have accompanied the recent period of low macroeconomic volatility (the so-called Great Moderation). One objective of the proposed research is to understand the role that structural change in the labor market may have played as a source of those changes. In particular, I plan to analyze the causes of the vanishing pro-cyclicality of labor productivity and their potential causes, including a more subdued use of labor hoarding by firms, possibly as a result of lower hiring/firing costs. In addition, I plan to study the consequences that such structural changes may have had on wage setting, and their ability to account for the apparent increase in wage flexibility during the recent period.

Field of science

  • /social sciences/economics and business/business and management/commerce
  • /social sciences/economics and business/economics/production economics/productivity

Call for proposal

ERC-2008-AdG
See other projects for this call

Funding Scheme

ERC-AG - ERC Advanced Grant
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Host institution

Centre de Recerca en Economia Internacional (CREI)
Address
Ramon Trias Fargas 25/27
08005 Barcelona
Spain
Activity type
Research Organisations
EU contribution
€ 600 000
Principal investigator
Jordi Galí (Dr.)
Administrative Contact
Anna Ricart (Ms.)

Beneficiaries (1)

Centre de Recerca en Economia Internacional (CREI)
Spain
EU contribution
€ 600 000
Address
Ramon Trias Fargas 25/27
08005 Barcelona
Activity type
Research Organisations
Principal investigator
Jordi Galí (Dr.)
Administrative Contact
Anna Ricart (Ms.)