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

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Author Info
K. Huang
Z. Liu
L. Phaneuf

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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.

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File URL: ftp://repec.bus.usu.edu/RePEc/usu/pdf/ERI2000-20.pdf
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Publisher Info
Paper provided by Utah State University, Department of Economics in its series Working Papers with number 2000-20.

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Length: 28 pages
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Handle: RePEc:usu:wpaper:2000-20

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Related research
Keywords: Staggered contracts; input-output structure; business cycle persistence; monetary policy;

Find related papers by JEL classification:
E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
F52 - International Economics - - International Relations and International Political Economy - - - National Security; Economic Nationalism

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This page was last updated on 2009-12-5.

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