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Persistence and Nominal Inertia in a Generalized Taylor Economy: How Longer Contracts Dominate Shorter Contracts

We develop the Generalized Taylor Economy (GTE) in which there are many sectors with overlapping contracts of different lengths. In economies with the same average contract length, monetary shocks will be more persistent when longer contracts are present. Using the Bils-Klenow distribution of contract lengths, we find that the corresponding GTE tracks the US data well. When we choose a GTE with the same distribution of completed contract lengths as the Calvo, the economies behave in a similar manner.

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Paper provided by Cardiff University, Cardiff Business School, Economics Section in its series Cardiff Economics Working Papers with number E2007/1.

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Length: 41 pages
Date of creation: Jan 2007
Date of revision:
Publication status: Forthcoming in European Economic Review
Handle: RePEc:cdf:wpaper:2007/1
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  24. Dixon, Huw, 2006. "The distribution of contract durations across firms: a unified framework for understanding and comparing dynamic wage and price setting models," Working Paper Series 0676, European Central Bank.
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