The Federal Reserve Board eagle logo links to home page

International Finance Discussion Papers
The International Finance Discussion Papers logo links to the International Finance Discussion Papers home page The Equivalence of Wage and Price Staggering in Monetary Business Cycle Models
Rochelle Edge
2000-672  (July 2000)

Abstract:  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.

Full paper (249 KB PDF)

Taylor-contracting, output persistence, sticky prices, sticky wages, firm-specific factor inputs

PDF files: Adobe Acrobat Reader   ZIP files: PKWARE

Home | IFDPs | List of 2000 IFDPs
To comment on this site, please fill out our feedback form.
Last update: July 19, 2001