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State Dependency in Price and Wage Setting

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  • Shuhei Takahashi

    (Institute of Economic Research, Kyoto University)

Abstract

The frequency of nominal wage adjustments varies with macroeconomic conditions, but existing models exclude such state dependency in wage setting and assume constant frequency under time-dependent setting. This paper develops a New Keynesian model in which fixed wage-setting costs generate state-dependent wage setting. I find that state-dependent wage setting reduces the real impacts of monetary shocks compared to time-dependent setting. However, when parameterized to reproduce the fluctuations in wage rigidity in the U.S., the state-dependent wage-setting model generates responses to monetary shocks similar to those of the time-dependent model. The trade-off between output gap and inflation variability is also similar between these two models.

Suggested Citation

  • Shuhei Takahashi, 2015. "State Dependency in Price and Wage Setting," KIER Working Papers 918, Kyoto University, Institute of Economic Research.
    • Handle: RePEc:kyo:wpaper:918
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    Cited by:

    1. Nakov, Anton & Petit, Borja & Costain, James, 2018. "Monetary policy implications of state-dependent prices and wages," CEPR Discussion Papers 13398, C.E.P.R. Discussion Papers.
    2. Shuhei Takahashi, 2018. "Does State-Dependent Wage Setting Generate Multiple Equilibria?," KIER Working Papers 991, Kyoto University, Institute of Economic Research.
    3. Le, Vo Phuong Mai & Meenagh, David & Minford, Patrick, 2020. "State-dependent pricing turns money into a two-edged sword," Cardiff Economics Working Papers E2019/15, Cardiff University, Cardiff Business School, Economics Section.
    4. Le, Vo Phuong Mai & Meenagh, David & Minford, Patrick, 2021. "State-dependent pricing turns money into a two-edged sword: A new role for monetary policy," Journal of International Money and Finance, Elsevier, vol. 119(C).

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    More about this item

    Keywords

    Nominal wage stickiness; state-dependent setting; time-dependent setting; monetary nonneutralities; New Keynesian models;
    All these keywords.

    JEL classification:

    • 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

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