Abstract: The frequency of nominal wage adjustments varies with macroeconomic conditions, but existing models exclude such state dependency in wage setting and assume constant frequency under time-dependent setting. This paper develops a New Keynesian model in which fixed wage-setting costs generate state-dependent wage setting. I find that state-dependent wage setting reduces the real impacts of monetary shocks compared to time-dependent setting. However, when parameterized to reproduce the fluctuations in wage rigidity in the U.S., the state-dependent wage-setting model generates responses to monetary shocks similar to those of the time-dependent model. The trade-off between output gap and inflation variability is also similar between these two models.
Publication Year: 2015
Publication Date: 2015-03-01
Language: en
Type: article
Access and Citation
AI Researcher Chatbot
Get quick answers to your questions about the article from our AI researcher chatbot