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1 NBB Conference Nominal Wage Rigdities in a New Keynesian Model with Frictional Unemployment by Bodart, de Walque, Pierrard, Sneessens, Wouters (UCL,

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Presentation on theme: "1 NBB Conference Nominal Wage Rigdities in a New Keynesian Model with Frictional Unemployment by Bodart, de Walque, Pierrard, Sneessens, Wouters (UCL,"— Presentation transcript:

1 1 NBB Conference Nominal Wage Rigdities in a New Keynesian Model with Frictional Unemployment by Bodart, de Walque, Pierrard, Sneessens, Wouters (UCL, NBB and BCL)

2 de Walque et al.New Keynesian Model with Frictional Unemployment ______________________________________________________________________________________________________ NBB Conference on « Price and Wage Rigidities in an Open Economy » October Starting point full-fledged DGSE NKM (Smets-Wouters (2003)) Objective better labor market representation labor market flows and tensions; Beveridge curve hours of work vs (un-)employment reexamine interactions nominal – real rigidities Motivation

3 de Walque et al.New Keynesian Model with Frictional Unemployment ______________________________________________________________________________________________________ NBB Conference on « Price and Wage Rigidities in an Open Economy » October negative correlation u-v ( -0.95) volatility of u and v (>5.0) real wage smooth (.5) slightly procyclical (.5) positive correlation job finding rate-tensions Some stylized facts Natural candidate: search model à la Mortensen-Pissarides

4 de Walque et al.New Keynesian Model with Frictional Unemployment ______________________________________________________________________________________________________ NBB Conference on « Price and Wage Rigidities in an Open Economy » October Back to an old problem… wages total hours of work B A C (Hall( 2003), Shimer (2004))

5 de Walque et al.New Keynesian Model with Frictional Unemployment ______________________________________________________________________________________________________ NBB Conference on « Price and Wage Rigidities in an Open Economy » October vacancies unemployment A B Beveridge Curve ( Shimer (2005) ) two issues: volatility, correlation

6 de Walque et al.New Keynesian Model with Frictional Unemployment ______________________________________________________________________________________________________ NBB Conference on « Price and Wage Rigidities in an Open Economy » October Merz (1995), Andolfatto (1996), Hall (2003), Shimer (2004) (critique of standard Nash bargaining) Bodart-Pierrard-Sneessens (2005) Calvo wage contracts (old and new jobs) Gertler-Trigari (2006) (large firms, quadratic labor adjustment costs) this paper (full-fledged DSGE) (Some) Related Contributions

7 de Walque et al.New Keynesian Model with Frictional Unemployment ______________________________________________________________________________________________________ NBB Conference on « Price and Wage Rigidities in an Open Economy » October Krause-Lubik (2003) (endo wage « rigidity » via on-the-job search) Trigari (2004) (wage-hours bargaining; endo job destruction) Christoffel-Kuester-Linzert (2005) (wage adj costs; sunk vacancy cost) Fujita-Ramey (2005) (sunk vacancy costs) Kuester (2006) (« integrates » wage and price setting) Alternative Routes

8 de Walque et al.New Keynesian Model with Frictional Unemployment ______________________________________________________________________________________________________ NBB Conference on « Price and Wage Rigidities in an Open Economy » October As close as possible to existing DSGE (Smets-Wouters (2003)) three types of firms sectors (retailers, intermediate, labor services) real rigidities ( monopolistic competition + labor search) price and wage rigidities Calvo contracts (old and new jobs) Modelling Strategy

9 de Walque et al.New Keynesian Model with Frictional Unemployment ______________________________________________________________________________________________________ NBB Conference on « Price and Wage Rigidities in an Open Economy » October Model Ingredients Consumers perfect insurance… decision 1: savings (with habit formation) decison 2: capital utilization rate decison 3: investment (capital adj. costs) resource constraint= wage (fixed+variable) or unempl.benefit + return on capital and bonds + redistributed profits

10 de Walque et al.New Keynesian Model with Frictional Unemployment ______________________________________________________________________________________________________ NBB Conference on « Price and Wage Rigidities in an Open Economy » October Firms Behavior Final goods producers price takers on all markets inputs = differentiated intermediate goods perfectly competitive final goods market Intermediate Goods Producers monopolistic competition price setters inputs = labor (hours*workers)+capital perfectly competitive input markets

11 de Walque et al.New Keynesian Model with Frictional Unemployment ______________________________________________________________________________________________________ NBB Conference on « Price and Wage Rigidities in an Open Economy » October Prices and Wages Price Setting Monopolistic competition Calvo contracts firms with different sizes, identical technologies Wage Setting One job-one firm setup (labor service firm) Nash bargaining, in Calvo framework Distinguihes old and new jobs Sluggish average wage

12 de Walque et al.New Keynesian Model with Frictional Unemployment ______________________________________________________________________________________________________ NBB Conference on « Price and Wage Rigidities in an Open Economy » October Vacancy Costs and Free Entry Condition A la Mortensen-Pissarides (MP) fixed recurrent cost a 1 cost per hire = a 1 * 1/q A la Gertler-Trigari (GT) variable recurrent cost such that… cost per hire = a 2 * hiring rate A la Fujita-Ramey (FR) sunk cost (heterogeneous across new entrants) new entrants: « marginal » sunk cost = job value

13 de Walque et al.New Keynesian Model with Frictional Unemployment ______________________________________________________________________________________________________ NBB Conference on « Price and Wage Rigidities in an Open Economy » October Evaluating the Model Calibration entirely based on « extraneous » information (empirical estimates, exit and entry probabilities) Simulation of streamlined model (no « frictions » nor price rigidity) comparison with Gertler-Trigari (2006) Simulation of full-fledged NKM labor search vs monopolistic labor market

14 de Walque et al.New Keynesian Model with Frictional Unemployment ______________________________________________________________________________________________________ NBB Conference on « Price and Wage Rigidities in an Open Economy » October Productivity Shock in Streamlined Model

15 de Walque et al.New Keynesian Model with Frictional Unemployment ______________________________________________________________________________________________________ NBB Conference on « Price and Wage Rigidities in an Open Economy » October

16 de Walque et al.New Keynesian Model with Frictional Unemployment ______________________________________________________________________________________________________ NBB Conference on « Price and Wage Rigidities in an Open Economy » October Productivity Shock in Streamlined Model

17 de Walque et al.New Keynesian Model with Frictional Unemployment ______________________________________________________________________________________________________ NBB Conference on « Price and Wage Rigidities in an Open Economy » October Productivity Shock in Streamlined Model

18 de Walque et al.New Keynesian Model with Frictional Unemployment ______________________________________________________________________________________________________ NBB Conference on « Price and Wage Rigidities in an Open Economy » October Interest Rate Shock in Complete Model

19 de Walque et al.New Keynesian Model with Frictional Unemployment ______________________________________________________________________________________________________ NBB Conference on « Price and Wage Rigidities in an Open Economy » October All Three Shocks in Complete Model Three types of shocks -productivity -interest rate -public expenditures Assumed not to be correlated

20 de Walque et al.New Keynesian Model with Frictional Unemployment ______________________________________________________________________________________________________ NBB Conference on « Price and Wage Rigidities in an Open Economy » October All Three Shocks in Complete Model

21 de Walque et al.New Keynesian Model with Frictional Unemployment ______________________________________________________________________________________________________ NBB Conference on « Price and Wage Rigidities in an Open Economy » October Conclusions Does as well as MC model on traditional variables; needs fine tuning of calibration estimation Reproduces fairly well the cyclical properties of key labor market variables Some weak points remain : hours of work, inflation response

22 de Walque et al.New Keynesian Model with Frictional Unemployment ______________________________________________________________________________________________________ NBB Conference on « Price and Wage Rigidities in an Open Economy » October vacancy cost and free entry condition extensive vs intensive margin bargaining and overtime compensation articulation wage-price decision endogenous separation Further research…


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