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Monetary policy implications of state-dependent prices and wages

James Costain, Anton Nakov () and Borja Petit

No 2272, Working Paper Series from European Central Bank

Abstract: We study the effects of monetary shocks in a model of state-dependent price and wage adjustment based on “control costs”. Suppliers of retail goods and of labor are both monopolistic competitors that face idiosyncratic productivity shocks and nominal rigidities. Stickiness arises because precise decisions are costly, so agents choose to tolerate small errors in the timing of adjustments. Our simulations are calibrated to microdata on the size and frequency of price and wage changes. Money shocks have less persistent real effects in our state-dependent model than they would a time-dependent framework, but nonetheless we obtain sufficient monetary nonneutrality for consistency with macroeconomic evidence. Nonneutrality is primarily driven by wage rigidity, rather than price rigidity. State-dependent nominal rigidity implies a flatter Phillips curve as trend inflation declines, because nominal adjustments become less frequent, making short-run inflation less reactive to shocks. JEL Classification: E31, D81, C73

Keywords: control costs; logit equilibrium; near rationality; nominal rigidity; state-dependent adjustment (search for similar items in EconPapers)
Date: 2019-04
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
Note: 3308697
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Working Paper: Monetary policy implications of state-dependent prices and wages (2019) Downloads
Working Paper: Monetary policy implications of state-dependent prices and wages (2018) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20192272

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