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Nominal vs real wage rigidities in New Keynesian models with hiring costs: A Bayesian evaluation

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  • Riggi, Marianna
  • Tancioni, Massimiliano

Abstract

The inclusion of labor market frictions in the new Keynesian DSGE model overcomes the main drawbacks of the baseline framework. In this paper we show that this extended model, by assuming real wage rigidities, does not replicate the correct wage dynamics and the negative conditional correlation between technology shocks and employment observed in the data, known as the "productivity-employment puzzle" . We show also that these empirical limitations can be overcome by replacing real wage rigidities with nominal wage rigidities, without sacrificing other appealing features of the model. We adopt a Bayesian perspective to estimate the dynamic properties of the model with real wage rigidities and compare them with those of the model with nominal wage rigidities. We show that the evidence favors this latter construction.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 34 (2010)
Issue (Month): 7 (July)
Pages: 1305-1324

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Handle: RePEc:eee:dyncon:v:34:y:2010:i:7:p:1305-1324

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Keywords: New-Keynesian model Labor market frictions Wage rigidities Technology shocks Bayesian inference;

References

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Citations

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Cited by:
  1. Knell, Markus, 2010. "Nominal and real wage rigidities. In theory and in Europe," Working Paper Series 1180, European Central Bank.
  2. Daniel Němec, 2013. "Investigating Differences Between the Czech and Slovak Labour Market Using a Small DSGE Model with Search and Matching Frictions," Czech Economic Review, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, vol. 7(1), pages 021-041, March.
  3. Ivashchenko, S., 2013. "Dynamic Stochastic General Equilibrium Model with Banks and Endogenous Defaults of Firms," Journal of the New Economic Association, New Economic Association, New Economic Association, vol. 19(3), pages 27-50.
  4. Guido Ascari & Efrem Castelnuovo & Lorenza Rossi, 2010. "Calvo vs. Rotemberg in a Trend Inflation World: An Empirical Investigation," "Marco Fanno" Working Papers 0116, Dipartimento di Scienze Economiche "Marco Fanno".
  5. Carrillo, Julio A., 2009. "Sticky information vs. Backward-looking indexation: Inflation inertia in the U.S," Research Memorandum 008, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).
  6. Nucci, Francesco & Riggi, Marianna, 2013. "Performance pay and changes in U.S. labor market dynamics," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 37(12), pages 2796-2813.
  7. Di Bartolomeo, Giovanni & Tirelli, Patrizio & Acocella, Nicola, 2012. "Inflation targets and endogenous wage markups in a New Keynesian model," Journal of Macroeconomics, Elsevier, Elsevier, vol. 34(2), pages 391-403.
  8. Francesco Nucci & Marianna Riggi, 2009. "The Great Moderation and Changes in the Structure of Labor Compensation," Working Papers 124, University of Rome La Sapienza, Department of Public Economics.

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