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Estimating Quarterly Different Price and Wage Rigidity and Its Implication for Monetary Policy

  • Sung Ho Park

    (Bank of Korea)

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    In New Keynesian economics, price and wage rigidity is a key factor in determining effects of monetary policy. As rigidity becomes stronger, the monetary policy becomes more effective. If this rigidity has seasonality, the effects of monetary policy may also have seasonality. Olivei and Tenreyo (2007) found that the effects of monetary policy in the US are quarterly different via quarter-dependent VAR and showed that these different effects of monetary policy is caused by the seasonality of wage rigidity by setting up the DSGE model with quarterly different wage rigidity which has different effects of monetary policy according to when monetary policy shocks occur. I extend the model of Olivei and Tenreyo (2007) by adding quarterly different price rigidity and compare which rigidity is more influential in determining the quarterly different effects of monetary policy. I also estimate the quarterly price and wage rigidity via Minimum Distance Approach. The results of this paper can be summarized as follows. Firstly, the impulse responses to monetary policy in the DSGE model change very much across quarters when we assume quarterly different wage rigidity. Impulse responses are strong(weak) if the monetary policy shocks occur in the quarter when the wage rigidity is strong(weak). However, these differences of impulse responses across quarters become weaker when we assume quarterly different price rigidity. This result is consistent to that of Christiano et al. (2005) who show that impulse responses do not change very much as values of price rigidity. Based on these impulse response results, we may that quarterly different impulse responses according to timing of monetary shocks depend mainly on quarterly varying wage rigidity. Secondly, the price puzzle occurs if monetary policy is implemented in the period when wage rigidity is strong. This result supports Rabanal (2007) and Henzel et al. (2009) who mphasize the role of wage rigidity in price puzzle. This results is Lastly, estimation results show that wage rigidity is quarterly different while price rigidity is not. Estimates of wage rigidity are high in the 2nd quarter and low in the 3rd quarter.However, estimates of price rigidity do not have particular patterns across quarters.

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    Paper provided by Society for Economic Dynamics in its series 2013 Meeting Papers with number 1367.

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    Date of creation: 2013
    Date of revision:
    Handle: RePEc:red:sed013:1367
    Contact details of provider: Postal: Society for Economic Dynamics Christian Zimmermann Economic Research Federal Reserve Bank of St. Louis PO Box 442 St. Louis MO 63166-0442 USA
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    1. Yun, Tack, 1996. "Nominal price rigidity, money supply endogeneity, and business cycles," Journal of Monetary Economics, Elsevier, vol. 37(2-3), pages 345-370, April.
    2. Julio Rotemberg & Michael Woodford, 1997. "An Optimization-Based Econometric Framework for the Evaluation of Monetary Policy," NBER Chapters, in: NBER Macroeconomics Annual 1997, Volume 12, pages 297-361 National Bureau of Economic Research, Inc.
    3. Giovanni Olivei & Silvana Tenreyro, 2004. "The timing of monetary policy shocks," Working Papers 04-1, Federal Reserve Bank of Boston.
    4. Steffen Henzel & Oliver Hülsewig & Eric Mayer & Timo Wollmershäuser, 2007. "The Price Puzzle Revisited: Can the Cost Channel Explain a Rise in Inflation after a Monetary Policy Shock?," CESifo Working Paper Series 2039, CESifo Group Munich.
    5. Lawrence J. Christiano & Martin Eichenbaum & Charles Evans, 2001. "Nominal rigidities and the dynamic effects of a shock to monetary policy," Working Paper 0107, Federal Reserve Bank of Cleveland.
    6. Ben S. Bernanke & Ilian Mihov, 1995. "Measuring Monetary Policy," NBER Working Papers 5145, National Bureau of Economic Research, Inc.
    7. Rabanal, Pau, 2007. "Does inflation increase after a monetary policy tightening? Answers based on an estimated DSGE model," Journal of Economic Dynamics and Control, Elsevier, vol. 31(3), pages 906-937, March.
    8. Christopher J. Erceg & Dale W. Henderson & Andrew T. Levin, 1999. "Optimal monetary policy with staggered wage and price contracts," International Finance Discussion Papers 640, Board of Governors of the Federal Reserve System (U.S.).
    9. Sims, Christopher A., 1992. "Interpreting the macroeconomic time series facts : The effects of monetary policy," European Economic Review, Elsevier, vol. 36(5), pages 975-1000, June.
    10. Emi Nakamura & Jón Steinsson, 2008. "Five Facts about Prices: A Reevaluation of Menu Cost Models," The Quarterly Journal of Economics, MIT Press, vol. 123(4), pages 1415-1464, November.
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