Identifying the Role of Labor Markets for Monetary Policy in an Estimated DSGE Model

We focus on a quantitative assessment of rigid labor markets in an environment of stable monetary policy. We ask how wages and labor market shocks feed into the inflation process and derive monetary policy implications. We structurally model matching frictions and rigid wages in line with an optimizing rationale in a New-Keynesian closed economy DSGE model. We estimate the model using Bayesian techniques. We find that labor market structure is of prime importance for the business cycle, and for monetary policy. Yet shocks originating in the labor market itself do not contain important information for the conduct of stabilization policy