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Nominal v. Real Wage Rigidities in New Keynesian Models with Hiring Costs

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  • Marianna Riggi
  • Massimiliano Tancioni

Abstract

The introduction of labor market frictions into the New Keynesian DSGE model solves some of the main drawbacks of the baseline framework. In this paper we show that this extended model, by assuming real wage rigidities, fails to replicate the correct wage dynamics and the observed negative conditional correlation between supply shocks and employment, known as “productivity employment puzzleâ€. We then show that these empirical limitations can be overcome by a model incorporating nominal wage rigidities in addition to price rigidities and hiring costs. Adopting a Bayesian perspective, we estimate the dynamic properties of the model with real wage rigidities and confront them with those of the model with nominal wage rigidities, concluding that there is decisive evidence in favor of the latter.

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Bibliographic Info

Paper provided by University of Rome La Sapienza, Department of Public Economics in its series Working Papers with number 107.

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Length: 42
Date of creation: Jan 2008
Date of revision:
Handle: RePEc:sap:wpaper:wp107

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Related research

Keywords: New Keynesian DSGE model; hiring costs; real and nominal wage rigidities; productivity-employment puzzle; Bayesian estimation and model selection.;

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References

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  1. Christoffel, Kai & Linzert, Tobias, 2005. "The Role of Real Wage Rigidity and Labor Market Frictions for Unemployment and Inflation Dynamics," IZA Discussion Papers 1896, Institute for the Study of Labor (IZA).
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  12. Kevin X. D. Huang & Zheng Liu, 1998. "Staggered Contracts and Business Cycle Persistence," Cahiers de recherche CREFE / CREFE Working Papers 105, CREFE, Université du Québec à Montréal.
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  14. Ben Bernanke & Mark Gertler, 1999. "Monetary policy and asset price volatility," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 77-128.
  15. Eric M. Leeper & Tao Zha, 2000. "Assessing simple policy rules: a view from a complete macro model," Working Paper 2000-19, Federal Reserve Bank of Atlanta.
  16. Marco Ratto & Werner Roeger, 2005. "An estimated open-economy model for the EURO area," Computing in Economics and Finance 2005 84, Society for Computational Economics.
  17. Michael T. Kiley, 1997. "Staggered price setting and real rigidities," Finance and Economics Discussion Series 1997-46, Board of Governors of the Federal Reserve System (U.S.).
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Cited by:
  1. Carrillo Julio A., 2010. "How Well Does Sticky Information Explain Inflation and Output Inertia?," Research Memorandum 018, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).

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