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Nominal Wage Inertia in General Equilibrium Models

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  • Nuno Alves
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    Abstract

    This paper argues that nominal wage inertia is a structural feature in low-inflation economies. Using a quarterly data set for six G7 countries we show that, unlike price inflation, nominal wage inflation responds sluggishly to both monetary and technology shocks. Accounting for this inertial behavior of nominal wages is a necessary condition for a model to capture the business cycle properties of nominal variables. We present several variants of the Calvo wage model that are able to mimic those properties in a general equilibrium framework. In contrast, models that focus on real wage rigidities or sticky prices fail to match the data.

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    File URL: http://www.bportugal.pt/en-US/BdP%20Publications%20Research/WP200415.pdf
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    Bibliographic Info

    Paper provided by Banco de Portugal, Economics and Research Department in its series Working Papers with number w200415.

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    Date of creation: 2004
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    Handle: RePEc:ptu:wpaper:w200415

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    Cited by:
    1. David Altig & Lawrence Christiano & Martin Eichenbaum & Jesper Linde, 2005. "Firm-Specific Capital, Nominal Rigidities and the Business Cycle," NBER Working Papers 11034, National Bureau of Economic Research, Inc.
    2. Danthine, Jean-Pierre & Kurmann, André, 2010. "The business cycle implications of reciprocity in labor relations," Journal of Monetary Economics, Elsevier, vol. 57(7), pages 837-850, October.

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