State Dependency in Price and Wage Setting
No 918, KIER Working Papers from Kyoto University, Institute of Economic Research
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 to time-dependent setting. However, when parameterized to reproduce the fluctuations in wage rigidity in the U.S., 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.
Keywords: Nominal wage stickiness; state-dependent setting; time-dependent setting; monetary nonneutralities; New Keynesian models (search for similar items in EconPapers)
JEL-codes: E31 E32 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge and nep-mac
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Journal Article: State Dependency in Price and Wage Setting (2017)
Working Paper: State Dependency in Price and Wage Setting (2014)
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