Young Economics.

Two new papers about real rigidities

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Dufour, Khalaf, and Kichian, “Structural Inflation Models with Real Wage Rigidities: The Case of Canada.”

Real wage rigidities have recently been proposed as a way of building intrinsic persistence in inflation within the context of New Keynesian Phillips Curves. Using two recent illustrative structural models, we evaluate empirically the importance of real wage rigidities in the data and the extent to which such models provide useful information regarding price stickiness. . . .

Results based on one of the models are relatively uninformative. . . . However, we obtain economically reasonable ranges for estimates of average frequency of price changes and some evidence for rigidity in real wages (as measured by a rigidity index) based on the other model we examine. In addition, our specification for the latter model yields significant [at usual levels] and correctly-signed reduced-form coefficient estimates, showing a trade-off between unemployment and inflation in the New Keynesian Phillips curve. . . .  [O]ur findings suggest that wage-rigidity based New Keynesian Phillips Curves hold promise empirically and provide interesting research directions.

Turino, “Non-price competition, real rigidities, and inflation dynamics.”

. . . [M]odern-day New Keynesian models [have] has so far neglected the consequences of extending competition between firms to the non-price dimension. This paper tries to fill this gap by enriching the canonical New Keynesian framework to include both price and non-price competition.

. . .

Building on Spence (1977),  [non-price competition] is introduced in the model by assuming that consumers’ tastes are endogenously determined, depending on the distribution of non-price activities across all the firms. . . .  [C]hanges in non-price activities that a ffect the distribution of market shares across firms in turn aff ect the elasticity of demand faced by each individual producer, and hence the degree of substitutability of their products.

. . .

To preview our results, we find that non-price competition does aff ect inflation dynamics, by increasing the inflation-marginal cost coeffcient. This result hinges on the property that, under very general assumptions, non-price competition generates a mechanism that dampens the overall degree of real rigidity in price-setting. In our framework, in fact, pricing and non-pricing policies are strategic complements, so that, through non-price tools, a firm mitigates the e ffect upon its market share made by price movements. This reduces the opportunity cost that price-setters face in changing their relative price, mitigates the degree of real rigidity and eventually increases the size of price changes. As a result, if firms engage in non-price competition, inflation becomes more sensitive to movements in marginal cost.

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Written by Alex

July 27, 2009 at 2:36 pm

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