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The equivalence of wage and price staggering in monetary business cycle models

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  • Rochelle M. Edge

Abstract

Chari, Kehoe, and McGratten's (1998) finding that a standard monetary business cycle model with staggered price setting is unable to generate sufficiently persistent real effects of monetary shocks has engendered a growing literature aimed at developing alternative mechanisms for producing greater persistence. The most popular approach at present in this literature appears to be one in which staggered wage contracts are used as either an alternative or a complement to a staggered price mechanism. This is informed by recent research by Andersen (1998) and Huang and Liu (1998) which finds that the staggered wage model, despite its superficial similarity to the staggered price setup, incorporates a very different microstructure that implies substantially more real persistence. This paper argues that these authors' findings rely heavily on the assumption that identical inputs are used by all firms, and demonstrates that, by assuming firm-specific factor inputs the staggered price model is as capable as the staggered wage model of generating persistent real responses to monetary shocks.

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Bibliographic Info

Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series International Finance Discussion Papers with number 672.

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Date of creation: 2000
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Handle: RePEc:fip:fedgif:672

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Keywords: Econometric models ; Business cycles;

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  1. Rochelle M. Edge, 2001. "Online Appendix to "The Equivalence of Wage and Price Staggering in Monetary Business Cycle Models"," Technical Appendices edge01, Review of Economic Dynamics.
  2. Olivier J. Blanchard, 1985. "The Wage Price Spiral," Working papers 400, Massachusetts Institute of Technology (MIT), Department of Economics.
  3. V. V. Chari & Patrick J. Kehoe & Ellen R. McGrattan, 1996. "Sticky Price Models of the Business Cycle: Can the Contract Multiplier Solve the Persistence Problem?," NBER Working Papers 5809, National Bureau of Economic Research, Inc.
  4. Huang, K.X. & Liu, Z., 1999. "Staggered Contracts and Business Cycle Persistence," Papers 305, Minnesota - Center for Economic Research.
  5. Evan F. Koenig, 1996. "Aggregate price adjustment: the Fischerian alternative," Working Papers 9615, Federal Reserve Bank of Dallas.
  6. Robert Feenstra & Paul Bergin, 2004. "staggered price setting and endogenous persistence," Working Papers 985, University of California, Davis, Department of Economics.
  7. Kimball, Miles S, 1995. "The Quantitative Analytics of the Basic Neomonetarist Model," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(4), pages 1241-77, November.
  8. Christopher J. Erceg, 1997. "Nominal wage rigidities and the propagation of monetary disturbances," International Finance Discussion Papers 590, Board of Governors of the Federal Reserve System (U.S.).
  9. Blanchard, Olivier Jean & Kahn, Charles M, 1980. "The Solution of Linear Difference Models under Rational Expectations," Econometrica, Econometric Society, vol. 48(5), pages 1305-11, July.
  10. King, Robert G. & Plosser, Charles I. & Rebelo, Sergio T., 1988. "Production, growth and business cycles : I. The basic neoclassical model," Journal of Monetary Economics, Elsevier, vol. 21(2-3), pages 195-232.
  11. Kim, Jinill, 2000. "Constructing and estimating a realistic optimizing model of monetary policy," Journal of Monetary Economics, Elsevier, vol. 45(2), pages 329-359, April.
  12. Andersen, Torben M., 1998. "Persistency in sticky price models," European Economic Review, Elsevier, vol. 42(3-5), pages 593-603, May.
  13. Michael T. Kiley, 1997. "Staggered price setting and real rigidities," Finance and Economics Discussion Series 1997-46, Board of Governors of the Federal Reserve System (U.S.).
  14. Hayashi, Fumio, 1982. "Tobin's Marginal q and Average q: A Neoclassical Interpretation," Econometrica, Econometric Society, vol. 50(1), pages 213-24, January.
  15. Rochelle M. Edge, 2000. "The equivalence of wage and price staggering in monetary business cycle models," International Finance Discussion Papers 672, Board of Governors of the Federal Reserve System (U.S.).
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