Hostname: page-component-cd9895bd7-hc48f Total loading time: 0 Render date: 2024-12-28T05:28:36.742Z Has data issue: false hasContentIssue false
  • English
  • Français

THE NEW KEYNESIAN WAGE PHILLIPS CURVE: CALVO VS. ROTEMBERG

Published online by Cambridge University Press:  27 November 2018

Benjamin Born  and
Johannes Pfeifer
Benjamin Born
Affiliation:
Frankfurt School of Finance & Management, CEPR, and CESifo
Johannes Pfeifer*
Affiliation:
University of Cologne
*
Address correspondence to: Johannes Pfeifer, University of Cologne, Albertus-Magnus-Platz, 50923 Köln, Germany. email: jpfeifer@uni-koeln.de
Get access Rights & Permissions [Opens in a new window]

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.

Keywords

Wage Phillips CurveWage StickinessRotembergCalvoWelfare
Type
Articles
Information
Macroeconomic Dynamics , Volume 24 , Issue 5 , July 2020 , pp. 1017 - 1041
Copyright
© Cambridge University Press 2018

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Footnotes

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.

References

Adjemian, S.et al. (2011) Dynare: Reference Manual, Version 4. Dynare Working Papers 1. CEPREMAP.Google Scholar
Ascari, G. and Rossi, L. (2012) Trend inflation and firms price-setting: Rotemberg versus Calvo. Economic Journal 122(563), 1115–1141.CrossRefGoogle Scholar
Ascari, G. and Sbordone, A. M. (2014) The macroeconomics of trend inflation. Journal of Economic Literature 52(3), 679–739.CrossRefGoogle Scholar
Backus, D. K., Kehoe, P. J. and Kydland, F. E. (1992) International real business cycles. Journal of Political Economy 100(4), 745–775.CrossRefGoogle Scholar
Barattieri, A., Basu, S. and Gottschalk, P. (2014) Some evidence on the importance of sticky wages. American Economic Journal: Macroeconomics 6(1), 70–101.Google Scholar
Basu, S. and Bundick, B. (2017) Uncertainty shocks in a model of effective demand. Econometrica 85(3), 937–958.CrossRefGoogle Scholar
Bilbiie, F. O., Fujiwara, I. and Ghironi, F. (2014) Optimal monetary policy with endogenous entry and product variety. Journal of Monetary Economics 64, 1–20.CrossRefGoogle Scholar
Bils, M. and Klenow, P. J. (2004) Some evidence on the importance of sticky prices. Journal of Political Economy 112(5), 947–985.CrossRefGoogle Scholar
Born, B. and Pfeifer, J. (2014) Policy risk and the business cycle. Journal of Monetary Economics 68, 68–85.CrossRefGoogle Scholar
Born, B. and Pfeifer, J. (2017) Uncertainty-Driven Business Cycles: Assessing the Markup Channel. CEPR Discussion Papers 11745.Google Scholar
Born, B., Peter, A. and Pfeifer, J. (2013) Fiscal news and macroeconomic volatility. Journal of Economic Dynamics and Control 37(12), 2582–2601.CrossRefGoogle Scholar
Calvo, G. A. (1983) Staggered prices in a utility-maximizing framework. Journal of Monetary Economics 12(3), 383–398.CrossRefGoogle Scholar
Chetty, R., Guren, A., Manoli, D. and Weber, A. (2011) Are micro and macro labor supply elasticities consistent? A review of evidence on the intensive and extensive margins. American Economic Review 101(3), 471–475.CrossRefGoogle Scholar
Christiano, L. J., Eichenbaum, M. and Evans, C. L. (2005) Nominal rigidities and the dynamic effects of a shock to monetary policy. Journal of Political 113(1), 1–45.Google Scholar
Christiano, L. J., Motto, R. and Rostagno, M. (2014) Risk shocks. American Economic Review 104(1), 37–65.CrossRefGoogle Scholar
Chugh, S. K. (2006) Optimal fiscal and monetary policy with sticky wages and sticky prices. Review of Economic Dynamics 9(4), 683–714.CrossRefGoogle Scholar
Damjanovic, T. and Nolan, C. (2011) Second-order approximation to the Rotemberg model around a distorted steady state. Economics Letters 110(2), 132–135.CrossRefGoogle Scholar
Dixit, A. K. and Stiglitz, J. E. (1977) Monopolistic competition and optimum product diversity. American Economic Review 67(3), 297–308.Google Scholar
Dmitriev, M. and Hoddenbagh, J. (2017) The financial accelerator and the optimal state-dependent contract. Review of Economic Dynamics 24, 43–65.CrossRefGoogle Scholar
Erceg, C. J., Henderson, D. W. and Levin, A. T. (2000) Optimal monetary policy with staggered wage and price contracts. Journal of Monetary Economics 46(2), 281–313.CrossRefGoogle Scholar
Faia, E., Lechthaler, W. and Merkl, C. (2014) Labor selection, turnover costs, and optimal monetary policy. Journal of Money, Credit and Banking 46(1), 115–144.CrossRefGoogle Scholar
Fernández-Villaverde, J., Guerrón-Quintana, P. A., Rubio-Ramírez, J. F. and Uribe, M. (2011) Risk matters: The real effects of volatility shocks. American Economic Review 101(6), 2530–2561.CrossRefGoogle Scholar
Fernández-Villaverde, J., Guerrón-Quintana, P. A., Kuester, K. and Rubio-Ramírez, J. F. (2015) Fiscal volatility shocks and economic activity. American Economic Review 105(11), 3352–3384.CrossRefGoogle Scholar
Galí, J. (2011) The return of the wage Phillips curve. Journal of the European Economic Association 9(3), 436–461.CrossRefGoogle Scholar
Galí, J. (2015) Monetary Policy, Inflation and the Business Cycle. 2nd ed. Princeton: Princeton University Press.Google Scholar
Greenwood, J., Hercowitz, Z. and Huffman, G. W. (1988) Investment, capacity utilization, and the real business cycle. American Economic Review 78(3), 402–417.Google Scholar
Hagedorn, M., Manovskii, I. and Mitman, K. (2018) The Fiscal Multiplier. Mimeo.Google Scholar
Heer, B., Klarl, T. and Maussner, A. (2012) Asset Pricing Implications of a New Keynesian Model: A Note. CESifo Working Paper Series 4041.Google Scholar
Johannsen, B. K. (2014) When are the effects of fiscal policy uncertainty large? Finance and Economics Discussion Series 2014–40. Federal Reserve Board.CrossRefGoogle Scholar
Jones, J. B. (2002) Has fiscal policy helped stabilize the postwar U.S. economy? Journal of Monetary Economics 49(4), 709–746.CrossRefGoogle Scholar
Keen, B. and Wang, Y. (2007) What is a realistic value for price adjustment costs in New Keynesian models? Applied Economics Letters 14(11), 789–793.CrossRefGoogle Scholar
Kim, J., Kim, S., Schaumburg, E. and Sims, C. A. (2008) Calculating and using second order accurate solutions of discrete time dynamic equilibrium models. Journal of Economic Dynamics and Control 32(11), 3397–3414.CrossRefGoogle Scholar
King, R. G. and Rebelo, S. T. (1999) Resuscitating real business cycles. In Taylor, J. B., and Woodford, M. (eds.), Handbook of Macroeconomics, Volume 1, Part A, pp. 927–1007. North Holland: Elsevier.10.1016/S1574-0048(99)10022-3CrossRefGoogle Scholar
Le Bihan, H., Montornès, J. and Heckel, T. (2012) Sticky wages: Evidence from quarterly microeconomic data. American Economic Journal: Macroeconomics 4(3), 1–32.Google Scholar
Lombardo, G. and Vestin, D. (2008) Welfare implications of Calvo vs. Rotemberg pricing assumptions. Economics Letters 100(2), 275–279.CrossRefGoogle Scholar
Mumtaz, H. and Zanetti, F. (2013) The impact of the volatility of monetary policy shocks. Journal of Money, Credit and Banking 45(4), 535–558.CrossRefGoogle Scholar
Nakamura, E. and Steinsson, J. (2008) Five facts about prices: A reevaluation of menu cost models. Quarterly Journal of Economics 123(4), 1415–1464.CrossRefGoogle Scholar
Nath, R. (2015) Asset Pricing in a New Keynesian Model with Sticky Wages. Mimeo. Oxford University.Google Scholar
Nisticó, S. (2007) The welfare loss from unstable inflation. Economics Letters 96(1), 51–57.CrossRefGoogle Scholar
Pariés, M. D., Kok Sørensen, C. and Rodriguez-Palenzuela, D. (2011) Macroeconomic propagation under different regulatory regimes: Evidence from an estimated DSGE model for the euro area. International Journal of Central Banking 7(4), 49–113.Google Scholar
Plante, M., Richter, A. W. and Throckmorton, N. A. (2018) The zero lower bound and endogenous uncertainty. Economic Journal 128(611), 1730–1757.CrossRefGoogle Scholar
Richter, A. W. and Throckmorton, N. A. (2016) Is Rotemberg pricing justified by macro data? Economics Letters 149, 44–48.10.1016/j.econlet.2016.10.011CrossRefGoogle Scholar
Roberts, J. M. (1995) New Keynesian economics and the Phillips Curve. Journal of Money, Credit and Banking 27(4), 975–984.CrossRefGoogle Scholar
Rotemberg, J. J. (1982) Sticky prices in the United States. Journal of Political Economy 90(6), 1187–1211.CrossRefGoogle Scholar
Sbordone, A. M. (2006) U.S. wage and price dynamics: A limited-information approach. International Journal of Central Banking 2(3), 155–191.Google Scholar
Schmitt-Grohé, S. and Uribe, M. (2006a) Comparing Two Variants of Calvo-type Wage Stickiness. NBER Working Paper 12740.CrossRefGoogle Scholar
Schmitt-Grohé, S. and Uribe, M. (2006b) Optimal Fiscal and Monetary Policy in a Medium-Scale Macroeconomic Model. NBER Macroeconomics Annual 2005, Volume 20, pp. 383–462.CrossRefGoogle Scholar
Smets, F. and Wouters, R. (2007) Shocks and frictions in US business cycles: A Bayesian DSGE approach. American Economic Review 97(3), 586–606.CrossRefGoogle Scholar
Taylor, J. B. (1999) Staggered price and wage setting in macroeconomics. In Taylor, J. B., and Woodford, M. (eds.), Handbook of Macroeconomics, Volume 1, Part B, pp. 1009–1050. North Holland: Elsevier.CrossRefGoogle Scholar
Trigari, A. (2009) Equilibrium unemployment, job flows, and inflation dynamics. Journal of Money, Credit and Banking 49(1), 1–32.CrossRefGoogle Scholar
Uhlig, H. (2007) Explaining asset prices with external habits and wage rigidities in a DSGE model. American Economic Review 97(2), 239–243.CrossRefGoogle Scholar
Woodford, M. (2002) Inflation stabilization and welfare. Contributions to Macroeconomics 2(1), 1–51.Google Scholar
Yun, T. (1996) Nominal price rigidity, money supply endogeneity, and business cycles. Journal of Monetary Economics 37(2), 345–370.CrossRefGoogle Scholar
Supplementary material: PDF

Born and Pfeifer supplementary material

Born and Pfeifer supplementary material 1

Download Born and Pfeifer supplementary material(PDF)
PDF 374.6 KB