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Trend Inflation and the Unemployment Volatility Puzzle

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  • Sergio A. Lago Alves

Abstract

I show that the combination of small positive trend inflation with staggered prices may account for the large relative volatilities found in US labor market data. The model does not have any wage rigidity and is hit only by an aggregate technology shock. The calibration procedure uses standard parameter values. Controlling for the sample average of the CPI inflation rate and the degree of price stickiness, the model solves the Shimer (2005) puzzle and explains the volatilities observed during two important sample periods: full sample (1951-2005) and Great Moderation (1985-2005).

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  • Sergio A. Lago Alves, 2012. "Trend Inflation and the Unemployment Volatility Puzzle," Working Papers Series 277, Central Bank of Brazil, Research Department.
    • Handle: RePEc:bcb:wpaper:277
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    Cited by:

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    2. Bruno Martins, 2012. "Local Market Structure and Bank Competition: evidence from the Brazilian auto loan market," Working Papers Series 299, Central Bank of Brazil, Research Department.
    3. Papadimitriou, Theophilos & Gogas, Periklis & Tabak, Benjamin M., 2013. "Complex networks and banking systems supervision," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 392(19), pages 4429-4434.
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    5. Di Pace, Federico & Villa, Stefania, 2016. "Factor complementarity and labour market dynamics," European Economic Review, Elsevier, vol. 82(C), pages 70-112.
    6. Di Pace, Federico & Villa, Stefania, 2016. "Factor complementarity and labour market dynamics," European Economic Review, Elsevier, vol. 82(C), pages 70-112.
    7. Alves, Sergio Afonso Lago, 2014. "Lack of divine coincidence in New Keynesian models," Journal of Monetary Economics, Elsevier, vol. 67(C), pages 33-46.
    8. Angelo Marsiglia Fasolo, 2012. "A Note on Particle Filters Applied to DSGE Models," Working Papers Series 281, Central Bank of Brazil, Research Department.
    9. Sergio A. Lago Alves, 2016. "Labor Markets in Heterogenous Sectors," Working Papers Series 421, Central Bank of Brazil, Research Department.
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    11. F. Di Pace & K. Mitra & S. Zhang, 2021. "Adaptive Learning and Labor Market Dynamics," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 53(2-3), pages 441-475, March.

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