Heterogeneity in Wage Setting Behavior in a New-Keynesian Model

S.C.W. Eijffinger, A. Grajales Olarte, R.B. Uras

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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.
Original languageEnglish
Place of PublicationTilburg
PublisherEconomics
Number of pages65
Volume2015-024
Publication statusPublished - 1 Apr 2015

Publication series

NameCentER Discussion Paper
Volume2015-024

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Keywords

  • Heterogeneity
  • price
  • wage and information stickiness
  • Bayesian estimation

Cite this

Eijffinger, S. C. W., Grajales Olarte, A., & Uras, R. B. (2015). Heterogeneity in Wage Setting Behavior in a New-Keynesian Model. (CentER Discussion Paper; Vol. 2015-024). Tilburg: Economics.