Working Paper: CEPR ID: DP10532
Authors: Sylvester C. W. Eijffinger; Anderson Grajales Olarte; Burak R. Uras
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.
Keywords: Bayesian estimation; heterogeneity; price rigidity; wage rigidity; information stickiness
JEL Codes: C11; E24; E31; E32; E52
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Heterogeneous wage rigidity (J31) | macroeconomic output fluctuations (E39) |
| Heterogeneous wage rigidity (J31) | persistence of price and wage inflation (E31) |
| Heterogeneous wage rigidity (J31) | output fluctuations from technology shocks (E39) |
| Heterogeneous wage rigidity (J31) | output fluctuations following monetary tightening (E39) |
| Wage setting behavior (heterogeneity) (J31) | macroeconomic outcomes (E66) |