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Policy Shocks and Wage Rigidities: Empirical Evidence from Regional Effects of National Shocks

Maarten De Ridder and Damjan Pfajfar ()

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

Abstract: This paper studies the effect of wage rigidities on the transmission of fiscal and monetary policy shocks. We calculate downward wage rigidities across U.S. states using the Current Population Survey. These estimates are used to explain differences in the state-level economic effects of identical national shocks in interest rates and taxes. In line with the role of sticky wages in New Keynesian models, we find that contractionary monetary policy and tax shocks increase unemployment and decrease economic activity in rigid states considerably more than in flexible states. We also find larger and more persistent effects of monetary and tax policy shocks for states where the ratio between minimum and median wage is higher and for states that do not have right-to-work legislation.

Keywords: Wage Rigidity; Monetary Policy; Tax Multipliers; U.S. states (search for similar items in EconPapers)
JEL-codes: E52 E62 J30 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-lma, nep-mac and nep-ure
Date: 2017-04-26
Note: mcd58
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