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Wage stickiness and unemployment fluctuations: an alternative approach

  • Miguel Casares


  • Antonio Moreno


  • Jesús Vázquez


Erceg et al. (J Monet Econ 46:281–313, 2000 ) 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 a Bayesian econometric approach, both models are estimated with US quarterly data of the Great Moderation. Estimation results are similar in the two models and both provide a good empirical fit, with the crucial difference that our model delivers unemployment fluctuations. Thus, second-moment statistics of the US rate of unemployment are replicated reasonably well in our proposed New-Keynesian model with sticky wages. Demand-side shocks play a more important role than technology innovations or cost-push shock in explaining both output and unemployment fluctuations. In the welfare analysis, the cost of cyclical fluctuations during the Great Moderation is estimated at 0.60% of steady-state consumption. Copyright The Author(s) 2012

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Article provided by Spanish Economic Association in its journal SERIEs.

Volume (Year): 3 (2012)
Issue (Month): 3 (September)
Pages: 395-422

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Handle: RePEc:spr:series:v:3:y:2012:i:3:p:395-422
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