Staggered Contracts and Business Cycle Persistence

Kevin X.D. Huang () and Zheng Liu ()

No 105, Cahiers de recherche CREFE / CREFE Working Papers from CREFE, Université du Québec à Montréal

Abstract: Staggered price and staggered wage contracts 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 the staggered wage mechanism, an intertemporal smoothing incentive in labor supply creates a real rigidity that is absent under the staggered price mechanism. Consequently, the two mechanisms have different implications on persistence. While the staggered price mechanism by itself does not contribute to, 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)
Date: Written 1998-12
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Related works:
Working Paper: Staggered contracts and business cycle persistence
Working Paper: Staggered Contracts and Business Cycle Persistence (1999)
Working Paper: Staggered contracts and business cycle persistence (1998)
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