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

Sung Ho Park
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Sung Ho Park: Bank of Korea

No 1367, 2013 Meeting Papers from Society for Economic Dynamics

Abstract: 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.

Date: 2013
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