Nominal v. Real Wage Rigidities in New Keynesian Models with Hiring Costs: A Bayesian Evaluation

35 Pages Posted: 25 Oct 2007 Last revised: 30 Sep 2011

See all articles by Marianna Riggi

Marianna Riggi

Bank of Italy

Massimiliano Tancioni

Sapienza University of Rome, Department of Public Economics

Date Written: October 16, 2009

Abstract

The introduction of labor market frictions into the New Keynesian DSGE model solves some of the main drawbacks of the baseline framework. In this paper we show that this extended model, by assuming real wage rigidities, fails to replicate the correct wage dynamics and the observed negative conditional correlation between supply shocks and employment, known as "productivity-employment puzzle". We then show that these empirical limitations can be overcome by replacing real wage rigidities with nominal wage rigidities, without discarding other appealing features of the model. By adopting a Bayesian perspective, we estimate the dynamic properties of the model with real wage rigidities and confront them with those of the model with nominal wage rigidities, concluding that there is decisive evidence in favor of the latter.

Keywords: New Keynesian model, labor market frictions, unemployment, sticky prices, real wage rigidities, nominal wage rigidities, divine coincidence, technology shock, bayesian estimation

JEL Classification: E24, E32, C11

Suggested Citation

Riggi, Marianna and Tancioni, Massimiliano, Nominal v. Real Wage Rigidities in New Keynesian Models with Hiring Costs: A Bayesian Evaluation (October 16, 2009). Available at SSRN: https://ssrn.com/abstract=1024524 or http://dx.doi.org/10.2139/ssrn.1024524

Marianna Riggi

Bank of Italy ( email )

Via Nazionale 91
00184 Roma
Italy

Massimiliano Tancioni (Contact Author)

Sapienza University of Rome, Department of Public Economics ( email )

Piazzale Aldo Moro 5
Roma, Rome 00185
Italy

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