Staggered contracts and business cycle persistence

Kevin Huang () and Zheng Liu

No 127, Discussion Paper / Institute for Empirical Macroeconomics from Federal Reserve Bank of Minneapolis

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 general equilibrium framework. We show that, although the dynamic price setting and the dynamic 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 have different implications on persistence. While the staggered price mechanism by itself is incapable of, the staggered wage mechanism has a great potential in generating persistence.

Keywords: Business; cycles (search for similar items in EconPapers)
Date: 1998
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Citations: View citations in EconPapers (23)

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Related works:
Working Paper: Staggered Contracts and Business Cycle Persistence (1999)
Working Paper: Staggered Contracts and Business Cycle Persistence (1998)
Working Paper: Staggered contracts and business cycle persistence
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