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Staggered contracts and persistence : microeconomic foundations and macroeconomic dynamics

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  • Jean-Pascal BENASSY

    (CEPREMAP and CNRS)

Abstract

We develop in this article a new form of wage contracts similar in spirit to those developed by Calvo (1983), and integrate these contracts into a dynamic stochastic grneral equilibrium model. Rational wage setting by utility maximizing trade-unions is explicitly modelled. We derive the optimal wage contracts, and compute the dynamic macroeconomic response to monetary shocks. It is shown that, unlike in most traditional models, this response can display strong persistence, a hump shaped response and positive autocorrelations in output and employment variations. All these results are obtained in a model with explicit closed-form solutions.

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Bibliographic Info

Paper provided by Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES) in its series Discussion Papers (REL - Recherches Economiques de Louvain) with number 2003021.

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Length: 20
Date of creation: 01 Jun 2003
Date of revision:
Handle: RePEc:ctl:louvre:2003021

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Keywords: Persistence; Staggered wages; Wage contracts;

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References

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  1. Olivier Jeanne, 1997. "Generating Real Persistent Effects of Monetary Shocks: How Much Nominal Rigidity Do We Really Need?," NBER Working Papers 6258, National Bureau of Economic Research, Inc.
  2. Benassy, Jean-Pascal, 1995. "Money and wage contracts in an optimizing model of the business cycle," Journal of Monetary Economics, Elsevier, Elsevier, vol. 35(2), pages 303-315, April.
  3. Kevin X. D. Huang & Zheng Liu & Louis Phaneuf, 2000. "On the Transmission of Monetary Policy Shocks," Cahiers de recherche CREFE / CREFE Working Papers, CREFE, Université du Québec à Montréal 112, CREFE, Université du Québec à Montréal, revised Sep 2001.
  4. Fabrice COLLARD & Guy ERTZ, 2000. "Stochastic Nominal Wage Contracts in a Cash-in-Advance model," Discussion Papers (REL - Recherches Economiques de Louvain), Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES) 2000032, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
  5. Taylor, John B, 1980. "Aggregate Dynamics and Staggered Contracts," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 88(1), pages 1-23, February.
  6. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, Elsevier, vol. 12(3), pages 383-398, September.
  7. Ascari, G., 1997. "Optimizing Agents, Staggered Wages and Persistence in the Real Effects of Money Shocks," The Warwick Economics Research Paper Series (TWERPS), University of Warwick, Department of Economics 486, University of Warwick, Department of Economics.
  8. V. V. Chari & Patrick J. Kehoe & Ellen R. McGrattan, 1998. "Sticky price models of the business cycle: can the contract multiplier solve the persistence problem?," Staff Report, Federal Reserve Bank of Minneapolis 217, Federal Reserve Bank of Minneapolis.
  9. Gray, Jo Anna, 1976. "Wage indexation: A macroeconomic approach," Journal of Monetary Economics, Elsevier, Elsevier, vol. 2(2), pages 221-235, April.
  10. Andersen, Torben M., 1998. "Persistency in sticky price models," European Economic Review, Elsevier, Elsevier, vol. 42(3-5), pages 593-603, May.
  11. Yun, Tack, 1996. "Nominal price rigidity, money supply endogeneity, and business cycles," Journal of Monetary Economics, Elsevier, Elsevier, vol. 37(2-3), pages 345-370, April.
  12. Timothy Cogley & James M. Nason, 1993. "Output dynamics in real business cycle models," Working Papers in Applied Economic Theory, Federal Reserve Bank of San Francisco 93-10, Federal Reserve Bank of San Francisco.
  13. Steve Ambler & Alain Guay & Louis Phaneuf, 1999. "Wage Contracts and Labor Adjustment Costs as Endogenous Propagation Mechanisms," Cahiers de recherche CREFE / CREFE Working Papers, CREFE, Université du Québec à Montréal 69, CREFE, Université du Québec à Montréal.
  14. Phelps, Edmund S & Taylor, John B, 1977. "Stabilizing Powers of Monetary Policy under Rational Expectations," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 85(1), pages 163-90, February.
  15. Fischer, Stanley, 1977. "Long-Term Contracts, Rational Expectations, and the Optimal Money Supply Rule," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 85(1), pages 191-205, February.
  16. Edmund Phelps, 1978. "Disinflation without recession: Adaptive guideposts and monetary policy," Review of World Economics (Weltwirtschaftliches Archiv), Springer, Springer, vol. 114(4), pages 783-809, December.
  17. Taylor, John B, 1979. "Staggered Wage Setting in a Macro Model," American Economic Review, American Economic Association, American Economic Association, vol. 69(2), pages 108-13, May.
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Cited by:
  1. James Yetman, 2007. "Explaining hump-shaped inflation responses to monetary policy shocks," Managerial and Decision Economics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 28(6), pages 605-617.

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