Working Paper: NBER ID: w12740
Authors: Stephanie Schmitt-Grohe; Martin Uribe
Abstract: We compare two ways of modeling Calvo-type wage stickiness. One in which each household is the monopolistic supplier of a differentiated type of labor input (as in Erceg, et al., 2000) and one in which households supply a homogenous labor input that is transformed by monopolistically competitive labor unions into a differentiated labor input (as in Schmitt-Grohe and Uribe, 2006a,b). We show that up to a log-linear approximation the two variants yield identical equilibrium dynamics, provided the wage stickiness parameter is in each case calibrated to be consistent with empirical estimates of the wage Phillips curve. It follows that econometric estimates of New Keynesian models that rely on log-linearizations of the equilibrium dynamics are mute about which type of wage stickiness fits the data better. In the context of a medium-scale macroeconomic model, we show that the two variants of the sticky-wage formulation give rise to the same Ramsey-optimal dynamics, which call for low volatility of price inflation. Furthermore, under both specifications the optimized operational interest-rate feedback rule features a large coefficient on price inflation and a mute response to wage inflation and output.
Keywords: wage stickiness; Phillips curve; monetary policy
JEL Codes: E31; E52
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| SGU model wage stickiness parameter calibrated to empirical estimates (C54) | identical equilibrium dynamics with EHL model (D50) |
| EHL model wage stickiness parameter calibrated to empirical estimates (C54) | identical equilibrium dynamics with SGU model (D58) |
| econometric estimates of New Keynesian models relying on log-linearizations (C51) | do not provide insights into which wage stickiness fits the data (J31) |
| available estimates of linear wage Phillips curves (J31) | nominal wages reoptimized every 3 to 4 quarters in EHL framework (J39) |
| available estimates of linear wage Phillips curves (J31) | nominal wages reoptimized every 10 to 12 quarters in SGU model (C54) |
| Ramsey optimal policy dynamics under both wage stickiness formulations (C54) | numerically the same (C59) |
| first-order conditions for Ramsey optimization (H21) | various constraints could lead to different policy implications (D78) |
| optimal operational interest rate rule under both models (E43) | pure inflation targeting rule (E31) |
| optimal operational interest rate rule under both models (E43) | substantial coefficient on price inflation and minimal response to wage inflation and output growth (E31) |