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The Return of the Wage Phillips Curve

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  • Jordi Galí
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    Abstract

    The standard New Keynesian model with staggered wage setting is shown to imply a simple dynamic relation between wage inflation and unemployment. Under some assumptions, that relation takes a form similar to that found in empirical wage equationsstarting from Phillips(1958) original workand may thus be viewed as providing some theoretical foundations to the latter. The structural wage equation derived here is shown to account reasonably well for the comovement of wage inflation and the unemployment rate in the U.S. economy, even under the strong assumption of a constant natural rate of unemployment.

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    Bibliographic Info

    Paper provided by Barcelona Graduate School of Economics in its series Working Papers with number 474.

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    Date of creation: Jun 2010
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    Handle: RePEc:bge:wpaper:474

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    Keywords: Staggered nominal wage setting; New Keynesian model; unemployment fluctuations; empirical wage equations;

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    1. Mackowiak, Bartosz Adam & Smets, Frank, 2008. "On Implications of Micro Price Data for Macro Models," CEPR Discussion Papers, C.E.P.R. Discussion Papers 6961, C.E.P.R. Discussion Papers.
    2. Jordi Galí & Frank Smets & Rafael Wouters, 2011. "Unemployment in an Estimated New Keynesian Model," NBER Chapters, National Bureau of Economic Research, Inc, in: NBER Macroeconomics Annual 2011, Volume 26, pages 329-360 National Bureau of Economic Research, Inc.
    3. Lawrence J. Christiano & Mathias Trabandt & Karl Walentin, 2010. "Involuntary Unemployment and the Business Cycle," NBER Working Papers 15801, National Bureau of Economic Research, Inc.
    4. Steven E. Haugen, 2009. "Measures of labor underutilization from the Current Population Survey," Working Papers, U.S. Bureau of Labor Statistics 424, U.S. Bureau of Labor Statistics.
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    6. Argia M. Sbordone, 2006. "U.S. wage and price dynamics: a limited information approach," Staff Reports, Federal Reserve Bank of New York 256, Federal Reserve Bank of New York.
    7. Nir Jaimovich & Sergio Rebelo, 2006. "Can News About the Future Drive the Business Cycle?," 2006 Meeting Papers, Society for Economic Dynamics 31, Society for Economic Dynamics.
    8. Gali, Jordi, 1996. "Unemployment in dynamic general equilibrium economies," European Economic Review, Elsevier, Elsevier, vol. 40(3-5), pages 839-845, April.
    9. Carlos Thomas, 2006. "Search and matching frictions and optimal monetary policy," LSE Research Online Documents on Economics, London School of Economics and Political Science, LSE Library 19782, London School of Economics and Political Science, LSE Library.
    10. Lawrence J. Christiano & Mathias Trabandt & Karl Walentin, 2010. "DSGE Models for Monetary Policy Analysis," NBER Working Papers 16074, National Bureau of Economic Research, Inc.
    11. Robert J. Gordon, 1997. "The Time-Varying NAIRU and Its Implications for Economic Policy," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 11(1), pages 11-32, Winter.
    12. Olivier Blanchard & Jordi Galí, 2010. "Labor Markets and Monetary Policy: A New Keynesian Model with Unemployment," American Economic Journal: Macroeconomics, American Economic Association, American Economic Association, vol. 2(2), pages 1-30, April.
    13. V. V. Chari & Patrick J. Kehoe & Ellen R. McGrattan, 2008. "New Keynesian models: not yet useful for policy analysis," Staff Report, Federal Reserve Bank of Minneapolis 409, Federal Reserve Bank of Minneapolis.
    14. Hamid Mehran & Joseph Tracy, 2001. "The effect of employee stock options on the evolution of compensation in the 1990s," Economic Policy Review, Federal Reserve Bank of New York, Federal Reserve Bank of New York, issue Dec, pages 17-34.
    15. Emi Nakamura & Jón Steinsson, 2008. "Five Facts about Prices: A Reevaluation of Menu Cost Models," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 123(4), pages 1415-1464, November.
    16. Douglas Staiger & James H. Stock & Mark W. Watson, 1997. "The NAIRU, Unemployment and Monetary Policy," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 11(1), pages 33-49, Winter.
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    Cited by:
    1. Galí, Jordi, 2010. "Monetary Policy and Unemployment," Handbook of Monetary Economics, Elsevier, in: Benjamin M. Friedman & Michael Woodford (ed.), Handbook of Monetary Economics, edition 1, volume 3, chapter 10, pages 487-546 Elsevier.
    2. Bande, Roberto & Karanassou, Marika, 2010. "Spanish Regional Unemployment Revisited: The Role of Capital Accumulation," IZA Discussion Papers 5012, Institute for the Study of Labor (IZA).

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