Staggered Contracts and Business Cycle Persistence

Abstract

Staggered price and staggered wage mechanisms are commonly viewed similar in generating persistent real effects of monetary shocks. In this paper, we distinguish these two mechanisms with individuals' optimizing behavior being explicitly taken into account. We show that, although the dynamic price and wage setting equations are alike, a key parameter governing persistence in these two equations is linked to the underlying preferences and technologies in very different ways. Consequently, the two mechanisms have quite different implications on persistence. While the staggered price mechanism by itself is incapable, the staggered wage mechanism has a much greater potential of generating persistence.