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Staggered price-setting, staggered wage-setting, and business cycle persistence

  • Huang, Kevin X. D.
  • Liu, Zheng

Staggered price-setting and staggered wage-setting are commonly viewed as similar mechanisms in generating persistent real effects of monetary shocks. In this paper, we distinguish the two mechanisms in a dynamic stochastic general equilibrium framework. We show that, although the dynamic price-setting and wage-setting equations are alike, a key parameter governing persistence is linked to the underlying preferences and technologies in different ways. Under staggered wage-setting, an intertemporal smoothing incentive in labor hours prevents the households from adjusting their wages too quickly in response to an aggregate demand shock, while such incentives are absent under staggered price-setting. With reasonable parameter values, the staggered price mechanism by itself is incapable of, while the staggered wage mechanism plays an important role in generating persistence.

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Article provided by Elsevier in its journal Journal of Monetary Economics.

Volume (Year): 49 (2002)
Issue (Month): 2 (March)
Pages: 405-433

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Handle: RePEc:eee:moneco:v:49:y:2002:i:2:p:405-433
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505566

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