Duval, Romain and Vogel, Lukas (2007): How do nominal and real rigidities interact? A tale of the second best.
This is the latest version of this item.
Download (249Kb) | Preview
This paper analyses the importance of real wage rigidities, in particular through their interaction with price stickiness, for optimal monetary policy in a calibrated small open economy DSGE model including oil in production and consumption. Blanchard and Galí (2007a) show real rigidities to introduce a trade-off between stabilising inflation and the welfare-relevant output gap. The present paper complements their findings by showing that the welfare cost of real rigidities can be substantial compared to nominal frictions. In a typical “tale of the second best”, we also show that in the presence of real wage rigidities, price stickiness can be welfare-enhancing.
|Item Type:||MPRA Paper|
|Original Title:||How do nominal and real rigidities interact? A tale of the second best|
|Keywords:||DSGE model, price stickiness, real wage rigidity, oil price shocks|
|Subjects:||E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E30 - General
D - Microeconomics > D6 - Welfare Economics > D60 - General
|Depositing User:||Lukas Vogel|
|Date Deposited:||11. Dec 2010 01:23|
|Last Modified:||16. Feb 2013 01:58|
Ascari, G. and C. Merkl (2009), “Real Wage Rigidities and the Cost of Disinflations,” Journal of Money, Credit and Banking Vol. 41, No. 2-3, pp. 417-435.
Barattieri, A., S. Basu and P. Gottschalk (2010), “Some Evidence on the Importance of Sticky Wages,” NBER Working Papers No. 16130.
Benigno, P. and M. Woodford (2005), “Inflation Stabilization and Welfare: The Case of a Distorted Steady State”, Journal of the European Economic Association Vol. 3, No. 6, pp. 1185-1236.
Bils, M. and P. Klenow (2004), “Some Evidence on the Importance of Sticky Prices”, Journal of Political Economy Vol. 112, No. 5, pp. 947-984.
Blanchard, O. and J. Galí (2007), “Real Wage Rigidities and the New Keynesian Model”, Journal of Money, Credit and Banking Vol. 39, No. 1, pp. 35-65.
Calvo, G. (1983), “Staggered Prices in a Utility-Maximizing Framework”, Journal of Monetary Economics Vol. 12, No. 3, pp. 383-398.
Canzoneri, M., R. Cumby and B. Diba (2007), “The Cost of Nominal Rigidity in NNS Models,” Journal of Money, Credit and Banking Vol. 39, No. 7, pp. 1563-1586.
Christiano, L., M. Eichenbaum and C. Evans (2005), “Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy,” Journal of Political Economy Vol. 113, No. 1, pp. 1-45.
Fernández-Villaverde, J. and J. Rubio-Ramírez (2007), “How Structural Are Structural Parameters?” NBER Macroeconomics Annual Vol. 22, pp. 83-137.
Fernández-Villaverde, J., P. Guerrón-Quintana and J. Rubio-Ramírez (2010), “Fortune or Virtue: Time-Variant Volatilities versus Parameter Drifting in U.S. Data,” NBER Working Papers No. 15928.
Gertler, M., L. Sala and A. Trigari (2008), “An Estimated Monetary DSGE Model with Unemployment and Staggered Nominal Wage Bargaining,” Journal of Money, Credit and Banking, Vol. 40, No. 8, pp. 1713-1764.
Gray, J. (1978), “On Indexation and Contract Length,” Journal of Political Economy, Vol. 86, No. 1, pp. 1-18. Khan, A., R. King and A. Wolman (2003), “Optimal Monetary Policy,” Review of Economic Studies Vol. 70, No. 4, pp. 825-860.
Levin, A., A. Onatski, J. Williams and N. Williams (2006), “Monetary Policy under Uncertainty in Micro-Founded Macroeconometric Models,” NBER Macroeconomics Annual 2005 Vol. 20, pp. 229-312.
Sahuc, J.-G. and F. Smets (2008), “Differences in Interest Rate Policy at the ECB and the Fed: An Investi-gation with a Medium-Scale DSGE Model,” Journal of Money, Credit and Banking Vol. 40, No. 2-3, pp. 505-521.
Smets, F. and R. Wouters (2003), “An Estimated Dynamic Stochastic General Equilibrium Model of the Euro Area,” Journal of the European Economic Association Vol. 1, No. 5, pp. 1123-1175.
Available Versions of this Item
How do nominal and real rigidities interact? A tale of the second best. (deposited 20. Feb 2008 16:49)
- How do nominal and real rigidities interact? A tale of the second best. (deposited 11. Dec 2010 01:23) [Currently Displayed]