TABLE 4. Price markups (elasticities of substitution)
| Tradables θT | Non-tradables θN | Imports of exports θX | |
|---|---|---|---|
| Home | 1.20 (6.0) | 1.50 (3.0) | 1.30 (4.3) |
| REA | 1.20 (6.0) | 1.50 (3.0) | 1.30 (4.3) |
| US | 1.20 (6.0) | 1.28 (4.6) | 1.20 (6.0) |
| RW | 1.20 (6.0) | 1.28 (4.6) | 1.20 (6.0) |
Note: REA=Rest of the euro area; US=United States; RW=Rest of world
TABLE 5. Nominal price rigidities
| Tradables ξT | Non-tradables ξN | Imports of exports ξX | |
|---|---|---|---|
| Home | 0.75 | 0.75 | 0.75 |
| REA | 0.92 | 0.92 | 0.75 |
| US | 0.75 | 0.75 | 0.75 |
| RW | 0.75 | 0.75 | 0.75 |
Note: REA=Rest of the euro area; US=United States; RW=Rest of world
TABLE 6. Monetary policy
| Weight on inflation φπ | Weight on output growth φY | Int. r. persistence φr | |
|---|---|---|---|
| Home | 1.70 | 0.10 | 0.87 |
| REA | 1.70 | 0.10 | 0.87 |
| US | 1.70 | 0.10 | 0.87 |
| RW | 1.70 | 0.10 | 0.87 |
Note: REA=Rest of the euro area; US=United States; RW=Rest of world
To calibrate the model with labour market frictions, we use the following strategy. First, we use identical parameters as in the model without labour market frictions (discussed above) wherever possible, in order to keep the two model versions harmonised to the greatest extent possible so that they are comparable. We can do this only for those parameters that are common to both models, such as the Frisch elasticity of labour supply and the frequency of resetting prices (see Table 5 for nominal price rigidities that are common across models) and wages. Second, for parameters that are specific to the model with search frictions, we use the values based either on the literature or empirical estimates. The calibration parameters are reported in Table 7 and we discuss both groups of parameters below in more detail.
In the first group of parameters that we can harmonise across both models are wage rigidities and Frisch labour supply elasticities. The Frisch labour supply elasticity is set to 0.5 as is typical in the literature (its inverse, ζ = 2). Even though the model with labour market frictions can distinguish between wage rigidities of new hires and wage rigidities of existing workers (measured by the probabilities that they start working at existing average wage), we set both to equal value (and to the value equal to that in the model with the standard labour market), so that ξw,i = ξw,j = κw,i = κw,j. These values are based on the estimates in De Walque et al. (2009).
In the second group of parameters that are not shared between both models, we set matching elasticities for both households to 0.5, in line with the range of values in Petrongolo and Pissarides (2001). We do this because we want to keep the model