Abstract

Erceg et al. (J Monet Econ 46:281–313, 2000) introduce sticky wages in a New-Keynesian general-equilibrium model. Alternatively, it is shown here how wage stickiness may bring unemployment fluctuations into a New-Keynesian model. Using a Bayesian econometric approach, both models are estimated with US quarterly data of the Great Moderation. Estimation results are similar in the two models and both provide a good empirical fit, with the crucial difference that our model delivers unemployment fluctuations. Thus, second-moment statistics of the US rate of unemployment are replicated reasonably well in our proposed New-Keynesian model with sticky wages. Demand-side shocks play a more important role than technology innovations or cost-push shock in explaining both output and unemployment fluctuations. In the welfare analysis, the cost of cyclical fluctuations during the Great Moderation is estimated at 0.60% of steady-state consumption.

Highlights

  • The basic New-Keynesian model (Woodford, 2003; chapter 3) has been extended in recent years to incorporate the endogenous determination of unemployment fluctuations in the labor market.1 For instance, Walsh (2005) and Trigari (2009) combined search frictions of the kind introduced in the Mortensen and Pissarides (1994) framework with sticky prices à la Calvo (1983)

  • What are the empirical implications of having unemployment as excess supply of labor in a New-Keynesian model? We address this question by following a Bayesian econometric approach to estimate the unemployment model using US quarterly data from the Great Moderation period (1984–2008)

  • We borrow the labor market structure of Casares (2010) and add inertial behavior of price and wage dynamics to describe a medium-scale New-Keynesian model with unemployment explained by wage rigidity (CMV model)

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Summary

Introduction

The basic New-Keynesian model (Woodford, 2003; chapter 3) has been extended in recent years to incorporate the endogenous determination of unemployment fluctuations in the labor market. For instance, Walsh (2005) and Trigari (2009) combined search frictions of the kind introduced in the Mortensen and Pissarides (1994) framework with sticky prices à la Calvo (1983). The model used in this paper extends that of Casares (2010) in two dimensions: (i) it incorporates price and wage indexation rules, and (ii) it adds new sources of business cycle fluctuations such as demand shocks and cost-push shocks. The difference between this model and that of Galí (2011) is that unemployment is here determined at a decentralized firm level, whereas Galí (2011) directly obtains unemployment as the difference between aggregate labor demand and a measure of aggregate labor supply.

The model
Analytical expressions of τ1 and τ2 are found to be τ1
Data and estimation procedure
Estimation results
Empirical fit
Second-moment statistics
Variance decomposition
Impulse-response functions
Robustness analysis
Alternative priors
Output filters
Introducing employment and a labor supply shock
Welfare cost of business cycle fluctuations
Findings
Conclusions
Full Text
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