Nominal v. Real Wage Rigidities in New Keynesian Models with Hiring Costs

Marianna Riggi and Massimiliano Tancioni ()

No 107, Working Papers in Public Economics from Department of Economics and Law, Sapienza University of Roma

Abstract: The introduction of labor market frictions into the New Keynesian DSGE model solves some of the main drawbacks of the baseline framework. In this paper we show that this extended model, by assuming real wage rigidities, fails to replicate the correct wage dynamics and the observed negative conditional correlation between supply shocks and employment, known as productivity employment puzzle. We then show that these empirical limitations can be overcome by a model incorporating nominal wage rigidities in addition to price rigidities and hiring costs. Adopting a Bayesian perspective, we estimate the dynamic properties of the model with real wage rigidities and confront them with those of the model with nominal wage rigidities, concluding that there is decisive evidence in favor of the latter.

Keywords: New Keynesian DSGE model; hiring costs; real and nominal wage rigidities; productivity-employment puzzle; Bayesian estimation and model selection. (search for similar items in EconPapers)
JEL-codes: C11 E24 E32 (search for similar items in EconPapers)
Pages: 42
Date: 2008-01
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Citations: View citations in EconPapers (2)

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