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Staggered contracts, intermediate goods and the dynamic effects of monetary shocks on output, inflation and real wages

Kevin Huang (), Zheng Liu () and L. Phaneuf

No 2000-20, Working Papers from Utah State University, Department of Economics

Abstract: This paper investigates the contributions of staggered price contracts, staggered wage contracts, and an input-output production structure in generating the observed persistence of real output and inflation, and the weak but persistent response of real wages following monetary shocks. It examines the interactions of these three mechanisms in a dynamic general equilibrium (DGE) environment, with pricing decision and wage setting rules derived from individual optimization. Following a monetary shock, (i) a staggered wage model generates more persistence in both inflation and output than does a staggered price model when intermediate goods are used in production; (ii) adding intermediate goods causes a tradeoff between output persistence and inflation persistence: it magnifies the autocorrelations of output while reducing those of inflation in both the short and medium horizons; (iii) a combination of staggered prices and staggered wages is required to generate the observed weak but persistent response of real wages to a monetary shock, and incorporating intermediate goods in such a model is essential to make the real wage response weakly procyclical.

Keywords: Staggered contracts; input-output structure; business cycle persistence; monetary policy (search for similar items in EconPapers)
JEL-codes: E31 F32 F52 (search for similar items in EconPapers)
Pages: 28 pages
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:usu:wpaper:2000-20

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