Equilibrium Unemployment, Job Flows and Inflation Dynamics,” European Central Bank Working paper 304

This paper develops a general equilibrium model to explain a set of facts regarding job flows, unemployment and inflation dynamics. It integrates a theory of equilibrium unemployment into a monetary model with nominal price rigidities. The labor market displays match-ing frictions and endogenous job destruction. The model can explain the cyclical behavior of unemployment, job creation, job destruction and the joint fluctuations of the labor input along both the extensive and the intensive margin conditional on a shock to monetary policy. Allowing for variation of the labor input at the extensive margin leads to a significantly lower elasticity of marginal costs with respect to output. This helps to explain the sluggishness of inflation and the persistence of output after a monetary policy shock