Date Added: May 2009
The key task of central banks is to maintain price stability by controlling inflation and, for this reason, it is important to understand what drives the dynamics of inflation. A crucial element of this is the underlying nature of nominal and real frictions associated with the adjustments of prices in the economy. A long tradition in monetary economics, starting with Phillips (1958), has assigned labour market frictions and, in particular wage-setting frictions, a central role in inflation dynamics. Not least given the wide diversity in labour market structures, institutions and policies across Europe, and the world more generally, it is of interest to know whether or not heterogeneity in certain aspects of the labour markets matters for inflation dynamics and, hence, monetary policy.