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Sticky Wages in a Stochastic DGE Model of the Business Cycle

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Abstract

In this paper a stochastic dynamic general equilibrium (DGE) model with capital accumulation is augmented by sticky wages. Wages are set in a staggered way as in Taylor (1980) implying that the optimal wage will be set for two periods. Prices are also sticky since there are adjustments cost of prices as in Rotemberg (1982). It is confirmed that wage staggering has a higher potential to generate persistent output responses to a money growth shock. Interestingly, adjustment costs of capital contribute strongly to output persistence. If it is not costly to adjust capital there is no output persistence at all. Price adjustment costs can strengthen the effects of money growth shocks on output in the presence of costly capital adjustment.

Suggested Citation

  • Michael Gail, 2004. "Sticky Wages in a Stochastic DGE Model of the Business Cycle," Volkswirtschaftliche Diskussionsbeiträge 114-04, Universität Siegen, Fakultät Wirtschaftswissenschaften, Wirtschaftsinformatik und Wirtschaftsrecht.
    • Handle: RePEc:sie:siegen:114-04
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    More about this item

    Keywords

    Monetary Policy; New Neoclassical Synthesis; Sticky Wages; Sticky Prices; Persistence;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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