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Firm-Specific or Household-Specific Sticky Wages in the New Keynesian Model?

  • Miguel Casares

    (Universidad Pública de Navarra)

This paper shows that switching the dominant use of household-specific sticky wages in the New Keynesian model (Erceg, Henderson, and Levin 2000) for firm-specific sticky wages has qualitative and quantitative consequences. First, the model with firm-specific sticky wages incorporates endogenous changes in the rate of unemployment, whereas there is no unemployment with household-specific sticky wages. Secondly, business-cycle fluctuations of wage inflation and the real wage are clearly distinguishable. In particular, the real wage is countercyclical after a demand shock under any sensible calibration with firm-specific sticky wages, whereas the model with household-specific sticky wages requires larger wage stickiness than price stickiness. Finally, optimal monetary policy is more oriented to stabilizing price inflation with firm-specific sticky wages, and is more oriented to stabilizing the output gap and wage inflation with household-specific sticky wages.

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Article provided by International Journal of Central Banking in its journal International Journal of Central Banking.

Volume (Year): 3 (2007)
Issue (Month): 4 (December)
Pages: 181-240

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Handle: RePEc:ijc:ijcjou:y:2007:q:4:a:6
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  1. Olivier J. Blanchard & Jordi Galí, 2005. "Real wage rigidities and the New Keynesian model," Proceedings, Board of Governors of the Federal Reserve System (U.S.).
  2. Robert J Gordon, 2005. "What Caused the Decline in US Business Cycle Volatility?," RBA Annual Conference Volume, in: Christopher Kent & David Norman (ed.), The Changing Nature of the Business Cycle Reserve Bank of Australia.
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  12. V. V. Chari & Patrick J. Kehoe & Ellen R. McGrattan, 2000. "Sticky Price Models of the Business Cycle: Can the Contract Multiplier Solve the Persistence Problem?," Econometrica, Econometric Society, vol. 68(5), pages 1151-1180, September.
  13. Ascari, Guido, 2000. "Optimising Agents, Staggered Wages and Persistence in the Real Effects of Money Shocks," Economic Journal, Royal Economic Society, vol. 110(465), pages 664-86, July.
  14. Michael Woodford, 1999. "Commentary : how should monetary policy be conducted in an era of price stability?," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 277-316.
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  17. Katharine G. Abraham & John C. Haltiwanger, 1995. "Real Wages and the Business Cycle," Journal of Economic Literature, American Economic Association, vol. 33(3), pages 1215-1264, September.
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