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Can Nominal Wage and Price Rigidities Be Equivalent Propagation Mechanisms? The Case of Open Economics

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  • Bo William Hansen
  • Lars Mayland Nielsen

    ()
    (The National Bank of Denmark)

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    Abstract

    Does it matter for the propagation mechanism following nominal shocks whether nominal rigidities are specified as sticky wages instead of sticky prices? We analyze the question in a standard dynamic general equilibrium "new open macro-economy" model, which is solved analytically. By comparing the adjustment patterns of the terms of trade, in an otherwise unchanged model under, respectively, nominal wage and price rigidities, we find that the two types of rigidities give rise to the same persistence pattern. Specifically, nominal wage and price rigidities are equivalent "impact adjusted" propagation mechanisms. Results are presented for one-period nominal rigidities and two-period nominal staggering.

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    File URL: ftp://ftp.econ.au.dk/afn/wp/02/wp02_4.pdf
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    Bibliographic Info

    Paper provided by School of Economics and Management, University of Aarhus in its series Economics Working Papers with number 2002-4.

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    Length: 18
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    Handle: RePEc:aah:aarhec:2002-4

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    Web page: http://www.econ.au.dk/afn/

    Related research

    Keywords: Nominal shocks; nominal rigidities; propagation; persistence; staggering;

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    1. Lane, Philip R., 2001. "The new open economy macroeconomics: a survey," Journal of International Economics, Elsevier, vol. 54(2), pages 235-266, August.
    2. Miles S. Kimball & Michael Woodford, 1994. "The quantitative analysis of the basic neomonetarist model," Proceedings, Federal Reserve Bank of Cleveland, pages 1241-1289.
    3. V. V. Chari & Patrick J. Kehoe & Ellen R. McGrattan, 2000. "Sticky Price Models of the Business Cycle: Can the Contract Multiplier Solve the Persistence Problem?," Econometrica, Econometric Society, vol. 68(5), pages 1151-1180, September.
    4. Andersen, Torben M., 1998. "Persistency in sticky price models," European Economic Review, Elsevier, vol. 42(3-5), pages 593-603, May.
    5. Jang-Ok Cho, 1993. "Money and Business Cycle with One-Period Nominal Contracts," Canadian Journal of Economics, Canadian Economics Association, vol. 26(3), pages 638-59, August.
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