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HETEROGENEITY IN WAGE SETTING BEHAVIOR IN A NEW-KEYNESIAN MODEL

  • Sylvester C. W. Eijffinger (a1), Anderson Grajales-Olarte (a2) and Burak R. Uras (a3)

Abstract

In this paper we estimate a New-Keynesian dynamic stochastic general equilibrium (NK DSGE) model with heterogeneity in price and wage setting behavior. In a recent study, Coibion and Gorodnichenko 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 framework by incorporating heterogeneity in nominal wage setting behavior among households. We solve this DSGE model and estimate it using Bayesian techniques for the US economy from 1955 to 2008. The estimation results show the relevance of heterogeneity in wage setting among households. More importantly, we identify qualitative and quantitative business cycle features allowed by the heterogeneity in wage rigidity, such as the persistence in price and wage inflation, which a standard NK model with only Calvo-type wage rigidity fails to achieve. We also show that modeling wage-rigidity heterogeneity—as opposed to standard Calvo wages—amplifies the macroeconomic output fluctuations resulting from a technology shock while it mitigates the output fluctuations following a monetary tightening.

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Corresponding author

Address correspondence to: Anderson Grajales-Olarte, Banco de la República Carrera 7 # 14-78, Bogotá, Colombia; e-mails: agrajaol@banrep.gov.co; a.grajalesolarte@tilburguniversity.edu. Phone: +57 300 4 24 73 78.

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We wish to thank William Barnett, Harry Huizinga, Louis Raes, Damjan Pfajfar, Ata Bertay, an associate editor, and an anonymous referee for their valuable comments and suggestions. We also thank the participants of the Tilburg EconomicsWorkshop and the European Banking Center Conference. The views expressed in this document are those of the authors and do not necessarily reflect those of the Central Bank of Colombia or those of its Board of Directors. All remaining errors are ours.

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References

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