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Downward Nominal Wage Rigidities Bend the Phillips Curve

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  • Daly, Mary C.

    () (Federal Reserve Bank of San Francisco)

  • Hobijn, Bart

    (Federal Reserve Bank of San Francisco)

Abstract

We show that the existence of downward nominal wage rigidities bends the short-run wage Phillips curve. We introduce a model of monetary policy with downward nominal wage rigidities and show that both the slope and curvature of the Phillips curve depend on the level of inflation and the extent of downward nominal wage rigidities. This is true for the both the long-run and the short-run Phillips curve. Comparing simulation results from the model with data on U.S. wage changes since the onset of the Great Recession, we show that downward nominal wage rigidities have likely played a role in shaping the dynamics of unemployment and wage growth from 2006 through 2012.

Suggested Citation

  • Daly, Mary C. & Hobijn, Bart, 2013. "Downward Nominal Wage Rigidities Bend the Phillips Curve," Working Paper Series 2013-08, Federal Reserve Bank of San Francisco, revised 11 Jan 2014.
  • Handle: RePEc:fip:fedfwp:2013-08 DOI: 10.24148/wp2013-08
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    Cited by:

    1. Williams, John C., 2015. "Data is the new black: monetary policy by the numbers," Speech 140, Federal Reserve Bank of San Francisco.
    2. Christian Dreger & Malte Rieth & David Pothier, 2015. "Is Globalization Reducing the Ability of Central Banks to Control Inflation? In-Depth Analysis," DIW Berlin: Politikberatung kompakt, DIW Berlin, German Institute for Economic Research, volume 106, number pbk106.
    3. Williams, John C., 2015. "The view from here: outlook and monetary policy," FRBSF Economic Letter, Federal Reserve Bank of San Francisco.
    4. Adiya Belgibayeva & Michal Horvath, 2015. "Optimal Conventional Stabilization Policy in a Liquidity Trap When Wages and Prices are Sticky," Discussion Papers 15/11, Department of Economics, University of York.
    5. Philippe Bacchetta & Elena Perazzi & Eric van Wincoop, 2015. "Self-Fulfilling Debt Crises: Can Monetary Policy Really Help?," NBER Working Papers 21158, National Bureau of Economic Research, Inc.
    6. David R Baqaee, 2014. "Asymmetric In?ation Expectations, Downward Rigidity of Wages,and Asymmetric Business Cycles," Working Paper 139681, Harvard University OpenScholar.
    7. Verdugo, Gregory, 2016. "Real wage cyclicality in the Eurozone before and during the Great Recession: Evidence from micro data," European Economic Review, Elsevier, vol. 82(C), pages 46-69.
    8. Williams, John C., 2015. "The recovery’s final frontier?," FRBSF Economic Letter, Federal Reserve Bank of San Francisco.
    9. Williams, John C., 2015. "Looking forward: the path for monetary policy," FRBSF Economic Letter, Federal Reserve Bank of San Francisco.
    10. Fallick, Bruce C. & Lettau, Michael & Wascher, William L., 2016. "Downward Nominal Wage Rigidity in the United States during and after the Great Recession," Working Paper 1602, Federal Reserve Bank of Cleveland.
    11. Szafranek, Karol, 2017. "Flattening of the New Keynesian Phillips curve: Evidence for an emerging, small open economy," Economic Modelling, Elsevier, vol. 63(C), pages 334-348.
    12. Daly, Mary C. & Hobijn, Bart, 2016. "The intensive and extensive margins of real wage adjustment," Working Paper Series 2016-4, Federal Reserve Bank of San Francisco.
    13. de Ridder, M. & Pfajfar, D., 2017. "Policy Shocks and Wage Rigidities: Empirical Evidence from Regional Effects of National Shocks," Cambridge Working Papers in Economics 1717, Faculty of Economics, University of Cambridge.
    14. Jean-François Rouillard, 2017. "Credit Crunch and Downward Nominal Wage Rigidities," Cahiers de recherche 17-05, Departement d'Economique de l'École de gestion à l'Université de Sherbrooke.
    15. William Gatt, 2016. "Time variation, asymmetry and threshold effect in Malta's Phillips curve," CBM Working Papers WP/02/2016, Central Bank of Malta.
    16. Santoro, Emiliano & Petrella, Ivan & Pfajfar, Damjan & Gaffeo, Edoardo, 2014. "Loss aversion and the asymmetric transmission of monetary policy," Journal of Monetary Economics, Elsevier, pages 19-36.
    17. Cecchetti, Stephen G & Feroli, Michael & Hooper, Peter & Kashyap, Anil K & Schoenholtz, Kermit, 2017. "Deflating Inflation Expectations: The Implications of Inflation's Simple Dynamics," CEPR Discussion Papers 11925, C.E.P.R. Discussion Papers.
    18. Mohammad Naim Azimi, 2016. "Drawing on Phillips curve: does the inverse relation between inflation and unemployment persist in transitional economies," International Journal of Economics and Accounting, Inderscience Enterprises Ltd, vol. 7(2), pages 89-100.
    19. Yellen, Janet L., 2016. "Macroeconomic Research After the Crisis : a speech at "The Elusive 'Great' Recovery: Causes and Implications for Future Business Cycle Dynamics" 60th annual economic conference sponsored by ," Speech 915, Board of Governors of the Federal Reserve System (U.S.).
    20. Peneva, Ekaterina V. & Rudd, Jeremy B., 2015. "The Passthrough of Labor Costs to Price Inflation," Finance and Economics Discussion Series 2015-42, Board of Governors of the Federal Reserve System (U.S.).
    21. Williams, John C., 2014. "Navigating toward normal: the future for policy," FRBSF Economic Letter, Federal Reserve Bank of San Francisco.
    22. Owen Grech & Noel Rapa, 2016. "STREAM: A structural macro-econometric model of the Maltese economy," CBM Working Papers WP/01/2016, Central Bank of Malta.
    23. Víctor López-Pérez, 2017. "Do professional forecasters behave as if they believed in the New Keynesian Phillips Curve for the euro area?," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 44(1), pages 147-174, February.
    24. Williams, John C., 2015. "Looking forward, forward looking: the path for monetary policy," Speech 138, Federal Reserve Bank of San Francisco.

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    Keywords

    Wages; Phillips curve;

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