More Complex NKE Models: Stickiness in Money Wages, Real Stickiness, and Extensions to a Medium-Size Model

This chapter addresses aspects of the NKE that are progressively more complex than the basic model previously considered. First, a nonlinear technology of production, the accumulation of capital, and the setting of wages by families in conditions of monopolistic competition or by a representative union are considered. Then, a complete log-linearized version of the NKE model with physical capital and adjustment costs is discussed, and the DYNARE code of this model is also examined. In the following sections, some extensions of this NKE model relating to Calvo stickiness in wage modifications, habit persistence and adjustment costs of capital and labor, “rules of thumb,” and non-Ricardian households are briefly mentioned. The main characteristics of these phenomena are given, but a specific model is not considered for each one. The reason is that many of the stated stickinesses are jointly considered in a final medium-sized model which includes many of the nominal stickinesses (prices and wages, backward indexing of out-of-date prices and wages) and the real stickinesses, relating to consumption and the production sector (such as habit formation in consumption, variable use of physical capital, adjustment costs, etc.) together with shocks in monetary and fiscal policies. The final two paragraphs include the DYNARE code for the numerical solution of the medium-sized NK model and the presentation of the results of the DYNARE code for the medium-sized NK model.