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Monopolistic Competition and Nominal Stickiness in Generalized New Keynesian Model

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  • Rui WANG

    (Department of Economics,Kanto Gakuen University)

Abstract

In this paper, we extend the standard New Keynesian Dynamic Stochastic General Equilibrium (DSGE) model to allow both staggered price setting and staggered wage setting and derive a gen-eralized version of New Keynesian model to study how these distortions affect the steady state and dynamics of model given different annual target inflation rates. The main finding is that the imperfec-tion of labor market has more distortionary power on aggregate output and aggregate welfare given positive target inflation rate. Sensitivity analysis of structural parameters in the context of static steady state provides us a macroeconomic structural model-based explanation for the stylized fact that many central banks set the target inflation rate within a range from 1% to 2%. Also, given positive target inflation rate, the dynamic responses of macroeconomic variables on exogenous shocks are more sen-sitive to the change of structural parameters related to labor market. By comparing the dynamics generated under different sets of calibration, we find that the structure of labor market with high de-gree of monopolistic competition, low wage stickiness and low wage indexation is more desirable in an economy with positive target inflation rate.

Suggested Citation

  • Rui WANG, 2019. "Monopolistic Competition and Nominal Stickiness in Generalized New Keynesian Model," Discussion Papers 1913, Graduate School of Economics, Kobe University.
    • Handle: RePEc:koe:wpaper:1913
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    File URL: http://www.econ.kobe-u.ac.jp/RePEc/koe/wpaper/neo2019/1913.pdf
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    References listed on IDEAS

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