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

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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Paper provided by Utah State University, Department of Economics in its series Working Papers with number 2000-28.

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Length: 36 pages
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Handle: RePEc:usu:wpaper:2000-28
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  26. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 1997. "Monetary policy shocks: what have we learned and to what end?," Working Paper Series, Macroeconomic Issues WP-97-18, Federal Reserve Bank of Chicago.
  27. Laurence Ball, 1992. "Disinflation With Imperfect Credibility," NBER Working Papers 3983, National Bureau of Economic Research, Inc.
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