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

Posted: 21 May 2010

See all articles by Marianna Riggi

Marianna Riggi

Bank of Italy

Massimiliano Tancioni

Sapienza University of Rome, Department of Public Economics

Date Written: May 21, 2010

Abstract

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

Riggi, Marianna and Tancioni, Massimiliano, Nominal vs Real Wage Rigidities in New Keynesian Models with Hiring Costs: A Bayesian Evaluation (May 21, 2010). Journal of Economic Dynamics and Control, Vol. 34, No. 7, 2010. Available at SSRN: https://ssrn.com/abstract=1612808

Marianna Riggi (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
00184 Roma
Italy

Massimiliano Tancioni

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

Piazzale Aldo Moro 5
Roma, Rome 00185
Italy

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