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INPUT–OUTPUT STRUCTURE AND NOMINAL RIGIDITY: THE PERSISTENCE PROBLEM REVISITED

Published online by Cambridge University Press:  10 June 2004

KEVIN X.D. HUANG  and
ZHENG LIU
KEVIN X.D. HUANG
Affiliation:
Federal Reserve Bank of Kansas City
ZHENG LIU
Affiliation:
Emory University and CIRPÉE
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Abstract

This paper revisits an important issue concerning the persistent real effect of a shock to monetary policy. Although recent sentiment has shifted away from price stickiness toward wage stickiness in explaining persistence, the present paper shows that introducing an input–output structure tends to make the former an equally important monetary transmission mechanism. Under staggered wage setting, the well-known relative-wage effect is the only source of endogenous sluggishness in wage, and thus price, adjustments, regardless of whether there is an intermediate input. Under staggered price setting, relative wages are constant, but the presence of an intermediate input creates a real-wage effect that prevents nominal wages from deviating too much from a sticky intermediate-input price. Meanwhile, stickiness in the intermediate-input price translates directly into sluggishness in marginal-cost movement. This reinforces the endogenous rigidity in the nominal wages and makes firms' pricing decisions even more rigid. Thus, although it makes no difference in output dynamics under staggered wage setting, the input–output structure improves the ability of staggered price setting in generating persistence. As a consequence, the conventional wisdom on the equivalence of price and wage staggering may continue to hold for some reasonable parameter values.

Keywords

Input–Output StructureStaggered Nominal ContractsBusiness-Cycle Persistence
Type
Research Article
Information
Macroeconomic Dynamics , Volume 8 , Issue 2 , April 2004 , pp. 188 - 206
Copyright
© 2004 Cambridge University Press

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