Citation

Discussion Paper Details

Please find the details for DP10532 in an easy to copy and paste format below:

Full Details   |   Bibliographic Reference

Full Details

Title: Heterogeneity in Wage Setting Behavior in a New-Keynesian Model

Author(s): Sylvester C W Eijffinger, Anderson Grajales and Burak Uras

Publication Date: April 2015

Keyword(s): Bayesian estimation, heterogeneity and price, wage and information stickiness

Programme Area(s): International Macroeconomics

Abstract: In this paper we estimate a New-Keynesian DSGE model with heterogeneity in price and wage setting behavior. In a recent study, Coibion and Gorodnichenko (2011) develop a DSGE model, in which firms follow four different types of price setting schemes: sticky prices, sticky information, rule of thumb, or flexible prices. We enrich Coibion and Gorodnichenko (2011) framework by incorporating heterogeneity in nominal wage setting behavior among households. We solve this DSGE model and estimate it using Bayesian techniques for the United States economy for the period of 1955-2014. Our results confirm the previous findings in the literature regarding the importance of nominal rigidity in wages to better match the macroeconomic data. More importantly, we identify qualitative as well as quantitative business cycle features allowed by the heterogeneity in wage rigidity, such as the persistence in price and the wage inflation, which a standard New Keynesian model with only Calvo-type wage rigidity fails to achieve. We also show that modelling wage rigidity heterogeneity - as oppose to standard-Calvo-wages - amplifies the macroeconomic output fluctuations resulting from a technology shock whereas it mitigates the output fluctuations following a monetary tightening.

For full details and related downloads, please visit: https://cepr.org/active/publications/discussion_papers/dp.php?dpno=10532

Bibliographic Reference

Eijffinger, S, Grajales, A and Uras, B. 2015. 'Heterogeneity in Wage Setting Behavior in a New-Keynesian Model'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=10532