Sticky Prices or Sticky Wages? An Equivalence Result

Florin Bilbiie and Mathias Trabandt

No 18542, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: We show an equivalence result in the 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 arises with identical price and wage Phillips-curve slopes and generalizes to any slopes' pair whose sum and product are identical. Equilibrium profits and wages are, however, substantially different; 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.

Keywords: Sticky; prices (search for similar items in EconPapers)
JEL-codes: E1 E3 E5 (search for similar items in EconPapers)
Date: 2023-10
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