A Real Business Cycle Model of the Phillips Curve

Abstract

The aim of this article is to show that RBC models can account for the so-called Phillips curve. We propose an efficiency wage model in which money is introduced via a cash-in-advance constraint. Households choose how much effort to devote by comparing present real and nominal wages with past ones. This special intertemporal effort function implies wage sluggishness and a higher volatility of employment compared to standard RBC models. It also reduces a negative contemporaneous correlation between inflation and output, one of the more difficult moments to match for a cash-in-advance model. The model allows to match labor market moments and also to build up a transmission mechanism that affects employment through nominal wage growth. The model generates a Phillips curve that is able to mimic US data.Efficiency wage; RBC; wage sluggishness; cash-in-advance; Phillips curve