Rule‐of‐Thumb Consumers Meet Sticky Wages

Abstract

It has been argued that rule of thumb consumers substantially alter the determinacy properties of interest rate rules and the dynamics of an otherwise standard newkeynesian model. In this paper we show that nominal wage stickiness helps restoring standard results. Key …ndings are that when wages are sticky i) the Taylor Principle returns the necessary condition for equilibrium determinacy; ii) consumption rises in response to an innovation in government spending if monetary policy is characterized by interest rate smoothing and by a moderately anti-in ‡ationary stance. Our results help explaining the reduction in the expansionary e¤ects of …scal shocks observed in the U.S. after 1980.JEL classi…cation: E52, E62.

In search of the Euro area fiscal stance

“…8 In this case model stability obtains because the implicit lump-sum taxation ensures government solvency. 9 When the hyperparameter is close to zero, it means we can use a reduced VAR, and the restrictions of the DSGE model does not count in the data. The selected DSGE model is misspeci…ed to explain the data.…”

Limited Asset Market Participation: Does it Really Matter for Monetary Policy?

“…11 As emphasized in Colciago (2010), the is due to the fact that the union maximizes a weighted average of agents utilities. 12 Please see Appendix A.2 for analytical details through the consumption of non-Ricardian consumers and for this reason appears in the IS curve.…”

“…They show that an imperfectly competitive labor market is a fundamental ingredient to obtain the crowding-in of consumption is response to an expansionary government spending shock identified, inter alia, by Blanchard and Perotti (2002) and Fatàs and Mihov (2001). Colciago (2010) and Furlanetto (2007) extend the analysis in Galì et al (2007) Sveen and Weinke (2007) find that in the presence of firms specific capital a NK model with both staggered price and wages may generate multiple equilibria. Flaschel et al (2008) analytically studies the determinacy properties of the model in the Erceg et al (2000).…”

“…With respect to Colciago (2010) we prove this result analytically, by studying determinacy properties of alternative interest rate rules in the presence of price-wage stickiness and an arbitrary degree of asset market participation. This finding casts shadows on Bilbiie's reappraisal of the conduct of monetary policy during the great inflation period.…”

Optimal Fiscal and Monetary Policies Under Limited Asset Market Participation

“…I calibrate the discount factor β to 1/1.01, the steady state mark-ups to 0.2, by setting μ = ν = 6, quarterly capital depreciation δ to 0.025 and the Rotemberg parameters for price and wage stickiness to 76, such that if a Calvo model was used instead, 7 nominal prices would be readjusted every 4.5 quarters. Such frequencies are not far from estimates in the literature, see Colciago (2011) and Smets and Wouters (2007). I set the share of labour in the production function α to 70 %, as in Schmitt-Grohé and Uribe (2006).…”