State Dependency in Price and Wage Setting

The frequency of nominal wage adjustments varies with macroeconomic conditions, but existing New Keynesian models exclude such state dependency in wage setting, assuming time-dependent setting. This paper develops a New Keynesian model in which fixed wage-setting costs generate state-dependent wage setting. I find that state- dependent wage setting reduces the real impacts of monetary shocks compared to time- dependent setting. However, when parameterized to reproduce the fluctuations in wage rigidity in the U.S., the state- and time-dependent models show similar responses to monetary shocks. The result suggests that state dependency in wage setting is largely irrelevant to the U.S. monetary transmission.