Nominal vs Real Wage Rigidities in New Keynesian Models with Hiring Costs: A Bayesian Evaluation
Posted: 21 May 2010
Date Written: May 21, 2010
The inclusion of labor market frictions in the new Keynesian DSGE model overcomes the main drawbacks of the baseline framework. In this paper we show that this extended model, by assuming real wage rigidities, does not replicate the correct wage dynamics and the negative conditional correlation between technology shocks and employment observed in the data, known as the “productivity-employment puzzle.” We show also that these empirical limitations can be overcome by replacing real wage rigidities with nominal wage rigidities, without sacrificing other appealing features of the model. We adopt a Bayesian perspective to estimate the dynamic properties of the model with real wage rigidities and compare them with those of the model with nominal wage rigidities. We show that the evidence favors this latter construction.
Keywords: New-Keynesian Model, Labor Market Frictions, Wage Rigidities, Technology Shocks, Bayesian Inference
JEL Classification: E32, E52, C11
Suggested Citation: Suggested Citation