Erceg, Henderson and Levin (2000, Journal of Monetary Economics) 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 Bayesian econometric techniques, both models are estimated with U.S. quarterly data of the Great Moderation. Estimation results are similar and provide a good empirical fit with the crucial difference that our proposal delivers unemployment fluctuations. Thus, second-moment statistics of U.S. unemployment are replicated reasonably well in our proposed New-Keynesian model with sticky wages. In the welfare analysis, the cost of cyclical fluctuations during the Great Moderation is estimated at 0.60% of steady-state consumption.
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, bothmodels 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.
