Labor Market Frictions, Real Rigidities And Inflation Dynamics

There are a lot of literatures, which study about the Chinese macroeconomic dynamic. But few peaple take labor market as a important part during their studies. The fact that labor market plaies a very importance role in inflation dynamics have been proved again and again. And there is a long history about labor market studing in foreign countries. Aftfer Peter Diamond, Dale T. Mortensehe and Christopher A. Pissarid, who do the researches of labor and matching modeles, won the Nobel Prize in economics, the study of labor market has been on the heat. But this heat wave does not advance to China.This paper draw lessons from foreign research on the labor markets,and set up a new Keynesian model which contains labor market searching and matching friction on the basis of Chinese macroeconomics. Through this model you can observe how the labor market effects the Chinese macroeconomic dynamic. This article also regarde the worker as a firm-specific factor of production, and come up with an assumption that there is a relationship between wage setting and price setting. This paper built a new Keynesian framework, which cintains the above characteristics on the case of China’s macroeconomic, and then established a Dynamic Stochastic General Equilibrium Model (DSGE) of the framework. The bayesian method is used to estimate this model. The results showed that:wages and prices are all have real rigidities, and some of the variables in the labor market can relatively affect the inflation dynamics and even the macroscopic economic dynamic.