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Wage Stickiness and Unemployment Fluctuations: An Alternative Approach

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  • Miguel Casares

    () (Departamento de Econom�a, Universidad P�blica de Navarra)

  • Antonio Moreno

    () (Departamento de Econom�a, Universidad de Navarra)

  • Jesús Vázquez

    () (Departamento de Fundamentos del An�lisis Econ�mico II, Universidad del Pa�s Vasco)

Abstract

Erceg, Henderson and Levin (2000, Journal of Monetary Economics) introduce sticky wages in a New-Keynesian general-equilibrium model. Alternatively, it is shown here how wage stickiness may bring unemployment fluctuations into a New-Keynesian model. Using Bayesian econometric techniques, both models are estimated with U.S. quarterly data of the Great Moderation. Estimation results are similar and provide a good empirical fit, with the crucial difference that our proposal delivers unemployment fluctuations. Thus, second-moment statistics of U.S. unemployment are replicated reasonably well in our proposed New-Keynesian model with sticky wages. In the welfare analysis, the cost of cyclical fluctuations during the Great Moderation is estimated at 0.60% of steady-state consumption.

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Bibliographic Info

Paper provided by School of Economics and Business Administration, University of Navarra in its series Faculty Working Papers with number 04/09.

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Length: 37 pages
Date of creation: 13 Aug 2009
Date of revision:
Handle: RePEc:una:unccee:wp0409

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Web page: http://www.unav.es/facultad/econom

Related research

Keywords: Wage Rigidity; Price Rigidity; Unemployment;

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  1. James S. Costain & Michael Reiter, 2004. "Stabilization versus insurance: welfare effects of procyclical taxation under incomplete markets," Working Papers 234, Barcelona Graduate School of Economics.
  2. Antonio Moreno, 2004. "Reaching Inflation Stability," Econometric Society 2004 North American Summer Meetings 269, Econometric Society.
  3. Philip Jung & Keith Kuester, 2008. "The (un)importance of unemployment fluctuations for welfare," Working Papers 08-31, Federal Reserve Bank of Philadelphia.
  4. Cooley, T.F. & Hansen, G.D., 1988. "The Inflation Tax In A Real Business Cycle Model," Papers 88-05, Rochester, Business - General.
  5. Fabio Canova & Filippo Ferroni, 2010. "Multiple Filtering Devices for the Estimation of Cyclical DSGE Models," Working Papers 498, Barcelona Graduate School of Economics.
  6. Hansen, Gary D., 1985. "Indivisible labor and the business cycle," Journal of Monetary Economics, Elsevier, vol. 16(3), pages 309-327, November.
  7. Smets, Frank & Wouters, Rafael, 2007. "Shocks and Frictions in US Business Cycles: A Bayesian DSGE Approach," CEPR Discussion Papers 6112, C.E.P.R. Discussion Papers.
  8. Mark Gertler & Luca Sala & Antonella Trigari, 2008. "An Estimated Monetary DSGE Model with Unemployment and Staggered Nominal Wage Bargaining," Working Papers 341, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  9. Richard Clarida & Jordi Gali & Mark Gertler, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," NBER Working Papers 7147, National Bureau of Economic Research, Inc.
  10. Christopher J. Erceg & Dale W. Henderson & Andrew T. Levin, 1999. "Optimal monetary policy with staggered wage and price contracts," International Finance Discussion Papers 640, Board of Governors of the Federal Reserve System (U.S.).
  11. Merz, Monika, 1995. "Search in the labor market and the real business cycle," Journal of Monetary Economics, Elsevier, vol. 36(2), pages 269-300, November.
  12. Thomas A. Lubik & Frank Schorfheide, 2004. "Testing for Indeterminacy: An Application to U.S. Monetary Policy," American Economic Review, American Economic Association, vol. 94(1), pages 190-217, March.
  13. Otrok, Christopher, 2001. "On measuring the welfare cost of business cycles," Journal of Monetary Economics, Elsevier, vol. 47(1), pages 61-92, February.
  14. Fabio Canova, 2004. "What explains the Great Moderation in the US? A structural analysis," Economics Working Papers 919, Department of Economics and Business, Universitat Pompeu Fabra, revised Dec 2007.
  15. Andrew T. Levin & Alexei Onatski & John C. Williams & Noah Williams, 2005. "Monetary policy under uncertainty in micro-founded macroeconometric models," Working Papers in Applied Economic Theory 2005-15, Federal Reserve Bank of San Francisco.
  16. Miguel Casares, 2008. "Sticky Prices, Sticky Wages, and also Unemployment," Documentos de Trabajo - Lan Gaiak Departamento de Economía - Universidad Pública de Navarra 0801, Departamento de Economía - Universidad Pública de Navarra.
  17. Walsh, Carl E., 2003. "Labor Market Search, Sticky Prices, and Interest Rate Policies," Santa Cruz Center for International Economics, Working Paper Series qt6tg550dv, Center for International Economics, UC Santa Cruz.
  18. Sbordone, Argia M., 2002. "Prices and unit labor costs: a new test of price stickiness," Journal of Monetary Economics, Elsevier, vol. 49(2), pages 265-292, March.
  19. Antonella Trigari, 2009. "Equilibrium Unemployment, Job Flows, and Inflation Dynamics," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 41(1), pages 1-33, 02.
  20. James Costain and Michael Reiter, 2001. "Stabilization versus Insurance," Computing in Economics and Finance 2001 161, Society for Computational Economics.
  21. Cho, J-O. & Cooley, T.F., 1988. "Employment And Hours Over The Business Cycle," Papers 88-03, Rochester, Business - General.
  22. Miguel Casares, 2007. "Firm-Specific or Household-Specific Sticky Wages in the New Keynesian Model?," International Journal of Central Banking, International Journal of Central Banking, vol. 3(4), pages 181-240, December.
  23. Robert E. Lucas Jr., 2003. "Macroeconomic Priorities," American Economic Review, American Economic Association, vol. 93(1), pages 1-14, March.
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