Sticky Prices or Sticky Wages? An Equivalence Result

Florin Bilbiie and Mathias Trabandt

Cambridge Working Papers in Economics from Faculty of Economics, University of Cambridge

Abstract: We show an equivalence result in the standard representative agent New Keynesian model after demand, wage markup and correlated price markup and TFP shocks: assuming sticky prices and flexible wages yields identical allocations for GDP, consumption, labor, inflation and interest rates to the opposite case- flexible prices and sticky wages. This equivalence result arises if the price and wage Phillips curves' slopes are identical and generalizes to any pair of price and wage Phillips curve slopes such that their sum and product are identical. Nevertheless, the cyclical implications for profits and wages are substantially different. We discuss how the equivalence breaks when these factor-distributional implications matter for aggregate allocations, e.g. in New Keynesian models with heterogeneous agents, endogenous firm entry, and non-constant returns to scale in production. Lastly, we point to an econometric identification problem raised by our equivalence result and discuss possible solutions thereof.

Keywords: inflation; Interest Rate; New Keynesian Model; Observational Equivalence; Output; Sticky Prices; Sticky Wages (search for similar items in EconPapers)
JEL-codes: E1 E3 E5 (search for similar items in EconPapers)
Date: 2023-10-20
New Economics Papers: this item is included in nep-dge, nep-ifn and nep-inv
Note: fob21
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Related works:
Working Paper: Sticky Prices or Sticky Wages? An Equivalence Result (2023)
Working Paper: Sticky Prices or Sticky Wages? An Equivalence Result (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:cam:camdae:2369

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