Premium
How Robust Are Popular Models of Nominal Frictions?
Author(s) -
KEEN BENJAMIN D.,
KOENIG EVAN F.
Publication year - 2018
Publication title -
journal of money, credit and banking
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.763
H-Index - 108
eISSN - 1538-4616
pISSN - 0022-2879
DOI - 10.1111/jmcb.12494
Subject(s) - indexation , economics , inflation (cosmology) , wage , econometrics , sample (material) , relative price , monetary economics , macroeconomics , monetary policy , labour economics , chemistry , physics , chromatography , theoretical physics
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.