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Wage Stickiness and Unemployment Fluctuations: An Alternative Approach

  • Miguel Casares


    (Departamento de Economía-UPNA)

  • Antonio Moreno


    (Departamento de Economía-Universidad de Navarra)

  • Jesús Vázquez


    (Departamento de Fundamentos del Análisis Económico II-Universidad del País Vasco)

Erceg, Henderson and Levin (2000, Journal of Monetary Economics) 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 Bayesian econometric techniques, both models are estimated with U.S. quarterly data of the Great Moderation. Estimation results are similar and provide a good empirical fit, with the crucial difference that our proposal delivers unemployment fluctuations. Thus, second-moment statistics of U.S. unemployment are replicated reasonably well in our proposed New-Keynesian model with sticky wages. In the welfare analysis, the cost of cyclical fluctuations during the Great Moderation is estimated at 0.60% of steady-state consumption.

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Paper provided by Departamento de Economía - Universidad Pública de Navarra in its series Documentos de Trabajo - Lan Gaiak Departamento de Economía - Universidad Pública de Navarra with number 0902.

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Length: pages
Date of creation: 2009
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Publication status: Published in
Handle: RePEc:nav:ecupna:0902
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