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Input-Output Structure and Nominal Staggering: The Persistence Problem Revisited

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This paper re-examines the conventional wisdom on the equivalence of staggered-wage setting and staggered-price setting in generating persistent real effects of aggregate demand shocks in a dynamic general equilibrium framework with an input-output production structure. Under staggered-wage setting, a relative wage consideration of households induces sluggish wage adjustments and thus sluggish price adjustments as well, just as in the case with no input-output connections. Under staggered-price setting, relative wages are constant, but the presence of the input-output structure creates a real wage effect which prevents nominal wages from deviating too much from the sticky intermediate input prices, resulting in an endogenous nominal wage rigidity; at the same time, the stickiness in the intermediate input prices translates directly into the sluggishness in marginal cost movements, reinforcing the real wage effect to increase the rigidity in firms' pricing decisions. Thus, while not helping the staggered-wage setting, the input-output structure improves the ability of the staggered-price setting in generating persistence. As a result, the conventional wisdom may continue to hold for some reasonable parameter values.

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  • Kevin X. D. Huang & Zheng Liu, 2001. "Input-Output Structure and Nominal Staggering: The Persistence Problem Revisited," Cahiers de recherche CREFE / CREFE Working Papers 145, CREFE, Université du Québec à Montréal.
  • Handle: RePEc:cre:crefwp:145
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    Cited by:

    1. Matheron, Julien & Poilly, Céline, 2009. "How well does a small structural model with sticky prices and wages fit postwar U.S. data?," Economic Modelling, Elsevier, vol. 26(1), pages 266-284, January.
    2. Emi Nakamura & Jón Steinsson, 2010. "Monetary Non-neutrality in a Multisector Menu Cost Model," The Quarterly Journal of Economics, Oxford University Press, vol. 125(3), pages 961-1013.
    3. Michael Gail, 2002. "Persistency and Money Demand Distortions in a Stochastic DGE Model with Sticky Prices and Capital," Volkswirtschaftliche Diskussionsbeiträge 103-02, Universität Siegen, Fakultät Wirtschaftswissenschaften, Wirtschaftsinformatik und Wirtschaftsrecht, revised 05 May 2003.
    4. Andrew T. Levin & Alexei Onatski & John Williams & Noah M. Williams, 2006. "Monetary Policy Under Uncertainty in Micro-Founded Macroeconometric Models," NBER Chapters,in: NBER Macroeconomics Annual 2005, Volume 20, pages 229-312 National Bureau of Economic Research, Inc.
    5. Jean Imbs & Eric Jondeau & Florian Pelgrin, 2006. "Aggregating Phillips curves," 2006 Meeting Papers 640, Society for Economic Dynamics.
    6. Nao Sudo, 2012. "Sectoral Comovement, Monetary Policy Shocks, and Input–Output Structure," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 44(6), pages 1225-1244, September.
    7. Munechika Katayama, 2013. "Declining Effects of Oil Price Shocks," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 45(6), pages 977-1016, September.
    8. Michael Dotsey & Robert G. King, 2006. "Pricing, Production, and Persistence," Journal of the European Economic Association, MIT Press, vol. 4(5), pages 893-928, September.

    More about this item

    Keywords

    Input-output structure; Staggered nominal contracts; Business cycle persistence.;

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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