ABSTRACT
A basic extension of the standard New-Keynesian model, which is constituted by a (purely) forward-looking price Phillips curve, a dynamic IS equation and a monetary policy rule, is concerned with an integration of labor markets. Introducing imperfect competition and staggered nominal wage setting in these markets, they can be treated in an analogous way to the goods markets; see Erceg et al. (2000), Woodford (2003, Ch.6), or Galí (2008, Ch.6). In its reduced form, the model now contains four dynamic variables: output gap, price inflation and wage inflation on the one hand, which are non-predetermined variables, and the real wage gap on the other hand, which is a predetermined variable.
