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Intrinsic persistence of wage inflation in New Keynesian models of the business cycles

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  • Di Bartolomeo, Giovanni
  • Di Pietro, Marco

Abstract

Our paper derives and estimates a New Keynesian wage Phillips curve that accounts for intrinsic inertia. Our approach considers a wage-setting model featuring an upward-sloping hazard function, that is based on the notion that the probability of resetting a wage depends on the time elapsed since the last reset. According to our specification, we obtain a wage Phillips curve that also includes backward-looking terms, which account for persistence. We test the slope of the hazard function using GMM estimation. Then, placing our equation in a small-scale New Keynesian model, we investigate its dynamic properties using Bayesian estimation. Model comparison shows that our model outperforms commonly used alternative methods to introduce persistence.

Suggested Citation

  • Di Bartolomeo, Giovanni & Di Pietro, Marco, 2020. "Intrinsic persistence of wage inflation in New Keynesian models of the business cycles," Dynare Working Papers 55, CEPREMAP.
  • Handle: RePEc:cpm:dynare:055
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    Cited by:

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    3. Di Bartolomeo, Giovanni & Di Pietro, Marco, 2018. "Optimal Inflation Targeting Rule Under Positive Hazard Functions For Price Changes," Macroeconomic Dynamics, Cambridge University Press, vol. 22(1), pages 135-152, January.
    4. Beqiraj Elton & Di Bartolomeo Giovanni & Serpieri Carolina, 2017. "Bounded-rationality and heterogeneous agents: Long or short forecasters?," wp.comunite 00132, Department of Communication, University of Teramo.

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    More about this item

    Keywords

    duration-dependent wage adjustments; intrinsic inflation persistence; DSGE models; hybrid Phillips curves; model comparison;
    All these keywords.

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General

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