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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. Frank Smets & Raf Wouters, 2007. "Shocks and Frictions in US Business Cycles : a Bayesian DSGE Approach," Working Paper Research 109, National Bank of Belgium.
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  11. Marco Ratto & Werner R�ger & Jan in't Veld & Riccardo Girardi, 2005. "An estimated new Keynesian dynamic stochastic general equilibrium model of the Euro area," European Economy - Economic Papers 220, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission.
  12. 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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  16. Rabanal, Pau & Rubio-Ramirez, Juan F., 2005. "Comparing New Keynesian models of the business cycle: A Bayesian approach," Journal of Monetary Economics, Elsevier, vol. 52(6), pages 1151-1166, September.
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Cited by:
  1. 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).

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