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A The data
B A stochastic volatility model
D The asymmetric real-wage rigidity model
E The downward real-wage rigidity model
We are grateful to Lawrence Ball, Olivier Blanchard, Renato Faccini, Giovanni Favara, Jordi Galì, Andrew Levin, Chris Pissarides, Pau Rabanal, Valerie Ramey, David Romer, Julio Rotemberg, Giovanna Vallanti and to conference participants at NBER Monetary Economics Meeting, the invited panel session on monetary policy of the European Economic Association Congress in Glasgow and the Sveriges Riksbank conference on “The Labor Market and the Macroeconomy” for helpful discussions. Federica Romei has provided excellent research assistance. Aygul Evdokimova offered excellent administrative assistance. Pierpaolo Benigno acknowledges financial support from an ERC Starting Independent Grant.
The terms long-run, trend, mean and low-frequency are used interchangeably throughout the paper.
Pissarides (2009) offers a critical appraisal of wage stickiness as a driver of the cyclical volatility of unemployment in search models.
Results similar to Figure 1 are obtained using ten-year rolling windows, the Hodrick-Prescott and Christiano-Fitzgerald filters.
The significance of downward real wage rigidity has been documented by a large number of empirical studies on micro-data, which are difficult to summarize in a few lines. Prominent examples include Dickens et al. (2008), Du Caju et al. (2009), Fagan and Messina (2009), Holden and Wulfsberg (2009) for the industrialized world and Calvo et al. (2006) for emerging markets.
These preferences are consistent with a balanced-growth path as we assume a drift in technology.
Notice that equation (11) holds because of the assumption of flexible prices which is necessary for analytical tractability.
The fact that dwt has the same properties of dwt(j) follows from the symmetry of the equilibrium.
The approximations are accurate as long as xt, p(xt) and πR(xt) remain appropriately bounded within the unit circle. In particular, a larger λ in absolute value requires stricter bounds for xt.
In the Figure, we use the following calibration: η = 2.5, ρ = 0.01, α = 0.66, θ = 6, μp = 1.15, μf = 0.05, χ = 9.14, In particular, the assumption on χ would translate in a Calvo’s model into an average duration of contracts on real wages equal to five quarters.
This is an appealing feature of the limiting case in contrast with the model of symmetric rigidities.
To make our empirical results comparable with earlier contributions (see for instance Staiger, Stock and Watson, 2001), we measure productivity as the ratio of output to total hours in the non-farm business sector, Y/L. This measure is computed and released by the Bureau of Labour Statistics. In our model, productivity is defined as Y/Lα and the first difference of its logarithm is denoted by g. It should be noted, however, that assuming a standard labour to capital ratio of 2/3 the correlation between g and the first difference of the logarithm of Y/L is 0.91 over our sample period.
Similar results are obtained using averages and variances of unemployment and productivity growth computed over either five- or ten-year rolling windows.
The estimates of this regression are: 0.0075 (.0014) for the intercept and 1.2716 (.0340) for the slope. Standard errors in parenthesis. R2 = 0.851. Sample: 1948Q1.2010Q2.
The countries are: Argentina, Australia, Austria, Belgium, Bulgaria, Canada, Chile, China, P.R.: Hong Kong, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Israel, Italy, Japan, Korea, Latvia, Lithuania, Luxembourg, Malaysia, Malta, Morocco, Netherlands, New Zealand, Norway, Peru, Philippines, Portugal, Russia, Slovak Republic, Slovenia, Spain, Sweden, Switzerland, Taiwan Prov.of China, Thailand, United Kingdom, United States, Venezuela, Rep. Bol.
The fact that dwt has the same properties of dwt(j) will follow from the symmetry of the equilibrium.
In fact, the homogenous function has been chosen appropriately for this purpose.