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Abstract

This paper re-examines the conventional wisdom on the equivalence of staggered-wage setting and staggered-price setting in generating persistent real effects of aggregate demand shocks in a dynamic general equilibrium framework with an input-output production structure. Under staggered-wage setting, a relative wage consideration of households induces sluggish wage adjustments and thus sluggish price adjustments as well, just as in the case with no input-output connections. Under staggered-price setting, relative wages are constant, but the presence of the input-output structure creates a real wage effect which prevents nominal wages from deviating too much from the sticky intermediate input prices, resulting in an endogenous nominal wage rigidity; at the same time, the stickiness in the intermediate input prices translates directly into the sluggishness in marginal cost movements, reinforcing the real wage effect to increase the rigidity in firms' pricing decisions. Thus, while not helping the staggered-wage setting, the input-output structure improves the ability of the staggered-price setting in generating persistence. As a result, the conventional wisdom may continue to hold for some reasonable parameter values.

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Paper provided by CREFE, Université du Québec à Montréal in its series Cahiers de recherche CREFE / CREFE Working Papers with number 145.

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Length: 23 pages
Date of creation: Oct 2001
Date of revision:
Handle: RePEc:cre:crefwp:145

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Related research

Keywords: Input-output structure; Staggered nominal contracts; Business cycle persistence.;

Find related papers by JEL classification:

• E24 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution
• E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
• E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

This paper has been announced in the following NEP Reports:

• NEP-ALL-2001-11-27 (All new papers)
• NEP-DGE-2001-11-27 (Dynamic General Equilibrium)
• NEP-ENT-2001-11-27 (Entrepreneurship)
• NEP-NET-2001-11-27 (Network Economics)

References

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Cited by:

1. Michael Dotsey & Robert G. King, 2001. "Pricing, Production and Persistence," NBER Working Papers 8407, National Bureau of Economic Research, Inc.
   
   • Michael Dotsey & Robert G. King, 2006. "Pricing, Production, and Persistence," Journal of the European Economic Association, MIT Press, vol. 4(5), pages 893-928, 09.
   • Michael Dotsey & Robert G. King, 2005. "Pricing, production, and persistence," Working Papers 05-4, Federal Reserve Bank of Philadelphia.
2. Matheron, J. & Poilly, C., 2006. "How Well Does a Small Structural Model with Sticky Prices and Wages Fit Postwar U.S. Data?," Working papers 148, Banque de France.
   
   • Matheron, Julien & Poilly, Céline, 2009. "How well does a small structural model with sticky prices and wages fit postwar U.S. data?," Economic Modelling, Elsevier, vol. 26(1), pages 266-284, January.
   • Julien Matheron & Céline Poilly, 2006. "How Well Does a Small Structural Model with Sticky Prices and Wages Fit Postwar U.S. Data?," THEMA Working Papers 2006-11, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.
3. Andrew T. Levin & Alexei Onatski & John C. Williams & Noah Williams, 2005. "Monetary Policy Under Uncertainty in Micro-Founded Macroeconometric Models," NBER Working Papers 11523, National Bureau of Economic Research, Inc.
   
   • Andrew T. Levin & Alexei Onatski & John Williams & Noah M. Williams, 2006. "Monetary Policy Under Uncertainty in Micro-Founded Macroeconometric Models," NBER Chapters, in: NBER Macroeconomics Annual 2005, Volume 20, pages 229-312 National Bureau of Economic Research, Inc.
   • Andrew T. Levin & Alexei Onatski & John C. Williams & Noah Williams, 2005. "Monetary policy under uncertainty in micro-founded macroeconometric models," Working Papers in Applied Economic Theory 2005-15, Federal Reserve Bank of San Francisco.
   • Noah Williams & Andrew Levin & Alexei Onatski, 2005. "Monetary Policy under Uncertainty in Micro-Founded Macroeconometric Models," Computing in Economics and Finance 2005 478, Society for Computational Economics.
4. FAME,Eric Jondeau, University of Lausanne-HEC & Jean Imbs & Eric Jondeau & Florian Pelgrin, 2006. "Aggregating Phillips Curves," Computing in Economics and Finance 2006 314, Society for Computational Economics.
   
   • Jean Imbs & Eric Jondeau & Florian Pelgrin, 2007. "Aggregating Phillips curves," Working Paper Series 785, European Central Bank.
   • Imbs, Jean & Jondeau, Eric & Pelgrin, Florian, 2007. "Aggregating Phillips Curves," CEPR Discussion Papers 6184, C.E.P.R. Discussion Papers.
   • Jean Imbs & Eric Jondeau & Florian Pelgrin, 2006. "Aggregating Phillips curves," 2006 Meeting Papers 640, Society for Economic Dynamics.
   • Jean Imbs & Eric Jondeau & Florian Pelgrin, 2007. "Aggregating Phillips Curves," Swiss Finance Institute Research Paper Series 07-06, Swiss Finance Institute.
5. Nao Sudo, 2008. "Sectoral Co-Movement, Monetary-Policy Shock, and Input-Output Structure," IMES Discussion Paper Series 08-E-15, Institute for Monetary and Economic Studies, Bank of Japan.
   
   • Nao Sudo, 2012. "Sectoral Comovement, Monetary Policy Shocks, and Input–Output Structure," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 44(6), pages 1225-1244, 09.
6. Emi Nakamura & Jón Steinsson, 2008. "Monetary Non-Neutrality in a Multi-Sector Menu Cost Model," NBER Working Papers 14001, National Bureau of Economic Research, Inc.
   
   • Emi Nakamura & Jón Steinsson, 2010. "Monetary Non-Neutrality in a Multisector Menu Cost Model," The Quarterly Journal of Economics, MIT Press, vol. 125(3), pages 961-1013, August.
   • Jon Steinsson & Emi Nakamura, 2007. "Monetary Non-Neutrality in a Multi-Sector Menu Cost Model," 2007 Meeting Papers 736, Society for Economic Dynamics.
7. Michael Gail, 2002. "Persistency and Money Demand Distortions in a Stochastic DGE Model with Sticky Prices and Capital," Computing in Economics and Finance 2002 302, Society for Computational Economics.
   
   • Michael Gail, 2002. "Persistency and Money Demand Distortions in a Stochastic DGE Model with Sticky Prices and Capital," Volkswirtschaftliche Diskussionsbeiträge 103-02, Universität Siegen, Fakultät Wirtschaftswissenschaften, Wirtschaftsinformatik und Wirtschaftsrecht, revised 05 May 2003.
8. Munechika Katayama, . "Declining Effects of Oil-Price Shocks," Departmental Working Papers 2009-02, Department of Economics, Louisiana State University.

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