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Networks, labor market frictions and inflation dynamics

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This paper discusses persistent and hump-shaped U.S. inflation responses to monetary shocks in
a new Keynesian matching model. Recent literature on business cycles argues that the production
networks structure could have first order implications for macroeconomics. To this end, we propose
a simple matching model which integrates networks. Numerical exercises on the calibrated
model offer three main results. First, in line with previous literature based on the VAR model, our
simulations confirm persistent and hump-shaped responses of inflation to monetary policy shocks.
Second, in order to generate these impulse responses, our model does not need to incorporate an
indexation price or real rigidities such as the formation of habits in consumption. Finally, the interaction
between frictions in the labor market and production networks is an important ingredient.
In the absence of networks, the model fails to replicate persistent and hump-shaped responses of
U.S. inflation to monetary policy shocks. This new evidence motivates our revisiting of inflation
and labor market dynamics.

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Jean-Baptiste Ntagoma et Jean-Paul K. Tsasa