Heterogeneity in Wage Setting Behavior in a New-Keynesian Model

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 opposed to standard‐Calvo‐wages ‐ amplifies the macroeconomic output fluctuations resulting from a technology shock whereas it mitigates the output fluctuations following a monetary tightening.

(Full paper)

CEPR Discussion Paper DP10532
JEL Classification: C11, E24, E31, E32 and E52
Keywords: Bayesian estimation, heterogeneity and price, wage and information stickiness
Sylvester C W Eijffinger s.c.w.eijffinger@uvt.nl
Tilburg University, CentER, European Banking Center and CEPR
Anderson Grajales Olarte a.grajalesolarte@tilburguniversity.edu
Tilburg University, CentER and European Banking Center
Burak R. Uras r.b.uras@uvt.nl
Tilburg University, CentER and European Banking Center

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