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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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