| Author/Presenter |
Maher Khaznaji (Universite du Quebec A Montreal) |
| Title |
Do Staggered Wage Setting Outperform Staggered Price Setting: The Equivalence Result Revisited |
| Abstract |
This paper examines the so-called equivalence of staggered price setting and staggered wage setting in generating persistence under Calvo contracts. The key assumption that allows such an equivalence to hold is that labor is firm-specific. Under certain parameter values, we show that a sticky price model featuring labor adjustment costs and a sticky wage model featuring habit persistence in leisure are observationally equivalent with respect to inflation and aggregate quantities. Each form of labor stickiness interacts positively with the nominal rigidity with which it is combined to increase persistence. But while the impact of sticky labor on the propagation of monetary policy shocks is quantitatively very small, it plays a significant role in increasing inflation persistence. Under sticky prices we show for the first time that there is an offsetting interaction between increasing returns-to-scale and firm-specific labor in producing persistence. We also corroborate the results of Huang (2006) who shows that in a model featuring price rigidity a la Taylor there is a negative interaction between specific labor and intermediate inputs in propagating monetary shocks. Our findings certainly cast doubt on the robustness of labor specificities, increasing returns-to-scale, and intermediate inputs in the transmission of nominal shocks. Finally our results suggest that the equivalence of both staggering mechanisms to generate output persistence seems to be robust to introducing some real frictions in the labor market as well as intermediate inputs. |
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