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THE NEW KEYNESIAN WAGE PHILLIPS CURVE: CALVO VS. ROTEMBERG

  • Benjamin Born (a1) and Johannes Pfeifer (a2)
Abstract

We systematically evaluate how to translate a Calvo wage duration into an implied Rotemberg wage adjustment cost parameter in medium-scale New Keynesian DSGE models by making use of the well-known equivalence of the two setups at first order. We consider a wide range of felicity functions and show that the assumed household insurance scheme and the presence of labor taxation greatly matter for this mapping, giving rise to differences of up to one order of magnitude. Our results account for the inclusion of wage indexing, habit formation in consumption, and the presence of fixed costs in production. We also investigate the conditional and unconditional welfare implications of the wage-setting schemes under efficient and distorted steady states.

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Corresponding author
Address correspondence to: Johannes Pfeifer, University of Cologne, Albertus-Magnus-Platz, 50923 Köln, Germany. email: jpfeifer@uni-koeln.de
Footnotes
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We thank Keith Kuester for very helpful discussions. We also thank an anonymous associate editor and two anonymous referees for their valuable comments. Replication files are available at https://github.com/JohannesPfeifer/DSGE_mod.

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Macroeconomic Dynamics
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