Abstract
Erceg et al. (J Monet Econ 46:281–313, 2000) introduce sticky wages in a New-Keynesian general-equilibrium model. Alternatively, it is shown here how wage stickiness may bring unemployment fluctuations into a New-Keynesian model. Using a Bayesian econometric approach, both models are estimated with US quarterly data of the Great Moderation. Estimation results are similar in the two models and both provide a good empirical fit, with the crucial difference that our model delivers unemployment fluctuations. Thus, second-moment statistics of the US rate of unemployment are replicated reasonably well in our proposed New-Keynesian model with sticky wages. Demand-side shocks play a more important role than technology innovations or cost-push shock in explaining both output and unemployment fluctuations. In the welfare analysis, the cost of cyclical fluctuations during the Great Moderation is estimated at 0.60% of steady-state consumption.
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We thank Gabriel Pérez-Quirós, two anonymous referees, and Francisco Galera for comments and suggestions. Financial support through research projects ECO2008-02641, ECO2009-11151, SEJ2007-66592-C03-01/ECON and ECO2010-16970 from Ministerio de Ciencia e Innovación (Spain) is also acknowledged. The first author also thanks Fundación Ramón Areces (VII Concurso Investigación en Economía) for financial support.
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Casares, M., Moreno, A. & Vázquez, J. Wage stickiness and unemployment fluctuations: an alternative approach. SERIEs 3, 395–422 (2012). https://doi.org/10.1007/s13209-011-0079-y
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DOI: https://doi.org/10.1007/s13209-011-0079-y