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State Dependency in Price and Wage Setting

Shuhei Takahashi

No 918, KIER Working Papers from Kyoto University, Institute of Economic Research

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 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
Date: 2015-03
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Related works:
Journal Article: State Dependency in Price and Wage Setting (2017) Downloads
Working Paper: State Dependency in Price and Wage Setting (2014) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:kyo:wpaper:918

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