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Can Nominal Wage and Price Rigidities Be Equivalent Propagation Mechanisms? The Case of Open Economics

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Listed author(s):
  • Bo William Hansen
  • Lars Mayland Nielsen

    ()

    (The National Bank of Denmark)

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    Abstract

    Does it matter for the propagation mechanism following nominal shocks whether nominal rigidities are specified as sticky wages instead of sticky prices? We analyze the question in a standard dynamic general equilibrium "new open macro-economy" model, which is solved analytically. By comparing the adjustment patterns of the terms of trade, in an otherwise unchanged model under, respectively, nominal wage and price rigidities, we find that the two types of rigidities give rise to the same persistence pattern. Specifically, nominal wage and price rigidities are equivalent "impact adjusted" propagation mechanisms. Results are presented for one-period nominal rigidities and two-period nominal staggering.

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    File URL: ftp://ftp.econ.au.dk/afn/wp/02/wp02_4.pdf
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    Paper provided by Department of Economics and Business Economics, Aarhus University in its series Economics Working Papers with number 2002-4.

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    Length: 18
    Date of creation:
    Handle: RePEc:aah:aarhec:2002-4
    Contact details of provider: Web page: http://www.econ.au.dk/afn/

    Keywords: Nominal shocks; nominal rigidities; propagation; persistence; staggering;

    Find related papers by JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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    1. Lane, Philip R., 2001. "The new open economy macroeconomics: a survey," Journal of International Economics, Elsevier, vol. 54(2), pages 235-266, August.
    2. Andersen, Torben M., 1998. "Persistency in sticky price models," European Economic Review, Elsevier, vol. 42(3-5), pages 593-603, May.
    3. Kimball, Miles S, 1995. "The Quantitative Analytics of the Basic Neomonetarist Model," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(4), pages 1241-1277, November.
    4. V. V. Chari & Patrick J. Kehoe & Ellen R. McGrattan, 2000. "Sticky Price Models of the Business Cycle: Can the Contract Multiplier Solve the Persistence Problem?," Econometrica, Econometric Society, vol. 68(5), pages 1151-1180, September.
    5. Jang-Ok Cho, 1993. "Money and Business Cycle with One-Period Nominal Contracts," Canadian Journal of Economics, Canadian Economics Association, vol. 26(3), pages 638-659, August.
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