Staggered price-setting, staggered wage-setting, and business cycle persistence

Kevin Huang () and Zheng Liu

No 2000-28, Working Papers from Utah State University, Department of Economics

Abstract: Staggered price-setting and staggered wage-setting are commonly viewed as similar mechanisms in generating persistent real effects of monetary shocks. In this paper, we distinguish the two mechanisms in a dynamic stochastic general equilibrium framework. We show that, although the dynamic price-setting and wage-setting equations are alike, a key parameter governing persistence is linked to the underlying preferences and technologies in different ways. Under staggered wage-setting, an intertemporal smoothing incentive in labor hours prevents the households from adjusting their wages too quickly in response to an aggregate demand shock, while such incentives are absent under staggered price-setting. With reasonable parameter values, the staggered price mechanism by itself is incapable of, while the staggered wage mechanism plays an important role in generating persistence.

Keywords: staggered contracts; business cycle persistence; monetary policy (search for similar items in EconPapers)
JEL-codes: E24 E32 E52 (search for similar items in EconPapers)
Pages: 36 pages
New Economics Papers: this item is included in nep-mac
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Journal Article: Staggered price-setting, staggered wage-setting, and business cycle persistence (2002)
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