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Do sticky prices or sticky wages matter for monetary non-neutrality?

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  • Ho, Cheuk Yin

Abstract

The textbook New Keynesian model shows that monetary non-neutrality exists in the presence of price rigidity or wage rigidity. This paper empirically examines the relative importance of these sources of nominal stickiness in transmitting monetary shocks on output. Difference-in-differences estimates show that relative to the sector without nominal stickiness, the output of the sector with sticky prices declines by about 2 percent at the trough after a one-standard-deviation increase in the contractionary monetary shock. The effects are smaller and statistically insignificant for the sector with sticky wages. The findings are robust to controlling for the kurtosis of price changes. Implications for theoretical modeling are discussed.

Suggested Citation

  • Ho, Cheuk Yin, 2025. "Do sticky prices or sticky wages matter for monetary non-neutrality?," Economics Letters, Elsevier, vol. 251(C).
    • Handle: RePEc:eee:ecolet:v:251:y:2025:i:c:s0165176525001478
    DOI: 10.1016/j.econlet.2025.112310
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    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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