How Robust Are Popular Models of Nominal Frictions?

We consider alternative combinations of nominal price and wage frictions in dynamic stochastic general equilibrium models fit to U.S. data. Since inflation was unanchored in the 1970s, we divide the data into early, middle, and late samples (1955–68, 1969–79, and 1983–2007, respectively). We find th...

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Bibliographic Details
Published in:Journal of money, credit and banking credit and banking, 2018-09, Vol.50 (6), p.1299-1342
Main Authors: KEEN, BENJAMIN D., KOENIG, EVAN F.
Format: Article
Language:English
Subjects:
C51
E31
E32
E52
Economic models
Equilibrium
Indexation
Inflation
Prices
sticky information
sticky prices
sticky wages
Wage determination
Wages & salaries
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Summary:We consider alternative combinations of nominal price and wage frictions in dynamic stochastic general equilibrium models fit to U.S. data. Since inflation was unanchored in the 1970s, we divide the data into early, middle, and late samples (1955–68, 1969–79, and 1983–2007, respectively). We find that prices are reoptimized more frequently and exhibit greater indexation to past inflation in the middle sample than in the other two samples, while wages are reoptimized with increasing frequency and display less evidence of indexation over time. Differences in price and wage setting across samples have important implications for the economy's response to key shocks.
ISSN:0022-2879
1538-4616
DOI:10.1111/jmcb.12494