The Non-equivalence Revisited: Staggered Price and Wage Contracts

Abstract

Staggered wage-setting and price-setting have frequently been used to construct business cycle models that can replicate long-lasting real effects of monetary shocks. We examine how the two seemingly equivalent sources of nominal rigidities compare in generating persistence in real output following monetary expansion. We show that staggered wage-setting is in general better able to generate persistence, because it can lower the procyclicality of marginal cost considerably more than staggered price-setting does.