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State Dependency in Price and Wage Setting

Shuhei Takahashi

International Journal of Central Banking, 2017, vol. 13, issue 1, 151-189

Abstract: The frequency of nominal wage adjustments varies with macroeconomic conditions, but existing models exclude such state dependency in wage setting and assume constant frequency under time-dependent setting. This paper develops a New Keynesian model in which fixed wage-setting costs generate state-dependent wage setting. I find that state-dependent wage setting reduces the real impacts of monetary shocks compared with time-dependent setting. However, when parameterized to reproduce the fluctuations in wage rigidity in the United States, the state-dependent wage-setting model generates responses to monetary shocks similar to those of the time-dependent model. The trade-off between output gap and inflation variability is also similar between these two models.

Date: 2017
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Related works:
Working Paper: State Dependency in Price and Wage Setting (2015) Downloads
Working Paper: State Dependency in Price and Wage Setting (2014) Downloads
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