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The Equivalence of Wage and Price Staggering in Monetary Business Cycle Models

  • Rochelle M. Edge


    (Federal Reserve Board)

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. (Copyright: Elsevier)

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Article provided by Elsevier for the Society for Economic Dynamics in its journal Review of Economic Dynamics.

Volume (Year): 5 (2002)
Issue (Month): 3 (July)
Pages: 559-585

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Handle: RePEc:red:issued:v:5:y:2002:i:3:p:559-585
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  1. Olivier J. Blanchard, 1985. "The Wage Price Spiral," Working papers 400, Massachusetts Institute of Technology (MIT), Department of Economics.
  2. Paul R. Bergin & Robert C. Feenstra, . "Staggered Price Setting And Endogenous Persistence," Department of Economics 98-05, California Davis - Department of Economics.
  3. Hayashi, Fumio, 1982. "Tobin's Marginal q and Average q: A Neoclassical Interpretation," Econometrica, Econometric Society, vol. 50(1), pages 213-24, January.
  4. 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.
  5. Miles S. Kimball, 1995. "The Quantitative Analytics of the Basic Neomonetarist Model," NBER Working Papers 5046, National Bureau of Economic Research, Inc.
  6. Kevin Huang & Z. Liu, . "Staggered contracts and business cycle persistence," Working Papers 2000-08, Utah State University, Department of Economics.
  7. 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.
  8. 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.
  9. 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 217, Federal Reserve Bank of Minneapolis.
  10. Rochelle M. Edge, 2002. "The Equivalence of Wage and Price Staggering in Monetary Business Cycle Models," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 5(3), pages 559-585, July.
  11. Andersen, Torben M., 1998. "Persistency in sticky price models," European Economic Review, Elsevier, vol. 42(3-5), pages 593-603, May.
  12. 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.).
  13. Evan F. Koenig, 1996. "Aggregate price adjustment: the Fischerian alternative," Working Papers 9615, Federal Reserve Bank of Dallas.
  14. 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.).
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