State Dependency in Price and Wage Setting

Shuhei Takahashi

No 34, UTokyo Price Project Working Paper Series from University of Tokyo, Graduate School of Economics

Abstract: The frequency of nominal wage adjustments varies with macroeconomic conditions. Existing macroeconomic analyses exclude such state dependency in wage setting, as- suming exogenous timing and constant frequency of wage adjustments under time- dependent setting (e.g., Calvo- and Taylor-style setting). To investigate how state dependency in wage setting influences the transmission of monetary shocks, this paper develops a New Keynesian model in which the timing and frequency of wage changes are endogenously determined in the presence of fixed wage-setting costs. I find that state-dependent wage setting reduces the real impacts of monetary shocks compared to time-dependent setting. Further, with state dependency, monetary nonneutralities decrease with the elasticity of demand for differentiated labor, while the opposite holds under time-dependent setting. Next, this paper examines the empirical importance of state dependency in wage setting. To this end, I augment the model with habit formation, capital accumula- tion, capital adjustment costs, and variable capital utilization. When parameterized to reproduce the fluctuations in wage rigidity observed in the U.S. data, the state- dependent wage-setting model shows a response to monetary shocks quite similar to that of the time-dependent counterpart. The result suggests that for the U.S. economy, state dependency in wage setting is largely irrelevant to the monetary transmission.

Keywords: Nominal wage stickiness; state-dependent setting; time-dependent set- ting; monetary nonneutralities; New Keynesian models. (search for similar items in EconPapers)
JEL-codes: E31 E32 (search for similar items in EconPapers)
Pages: 34 pages
Date: 2014-11
New Economics Papers: this item is included in nep-dge and nep-mac
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Related works:
Journal Article: State Dependency in Price and Wage Setting (2017)
Working Paper: State Dependency in Price and Wage Setting (2015)
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