Hostname: page-component-586b7cd67f-tf8b9 Total loading time: 0 Render date: 2024-11-20T11:43:36.836Z Has data issue: false hasContentIssue false
  • English
  • Français

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
Get access Rights & Permissions [Opens in a new window]

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

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Ambler S., E. Cardia & C. Zimmermann 2002 International transmission of the business cycle in a multi-sector model. European Economic Review 46, 273– 300.Google Scholar
Andersen T.M. 1998 Persistency in sticky price models. European Economic Review 42, 593– 603.Google Scholar
Ascari G. 2000 Optimizing agents, staggered wages and persistence in the real effects of money shocks. Economic Journal 110, 664– 686.Google Scholar
Ascari G. 2001 Price/Wage Staggering and Persistence: A Unifying Framework. Mimeo, University of Pavia.
Ball L. & D. Romer 1990 Real rigidity and the non-neutrality of money. Review of Economic Studies 57, 183– 203.Google Scholar
Basu S. 1995 Intermediate goods and business cycles: Implications for productivity and welfare. American Economic Review 85, 512– 531.Google Scholar
Basu S. 1996 Procyclical productivity: Increasing returns or cyclical utilization? Quarterly Journal of Economics 111, 719– 751.Google Scholar
Basu S. & J.G. Fernald 1994 Constant Returns and Small Markups in U.S. Manufacturing. International Finance discussion paper 483, Board of Governors of the Federal Reserve System.
Basu S. & J.G. Fernald 1995 Are apparent productive spillovers a figment of specification error? Journal of Monetary Economics 36, 165– 188.Google Scholar
Basu S. & J.G. Fernald 1997 Returns to scale in U.S. production: Estimates and implications. Journal of Political Economy 105, 249– 283.Google Scholar
Basu S. & M.S. Kimball 1997 Cyclical Productivity with Unobserved Input Variation. NBER working paper 5915.
Bergin P. & R.C. Feenstra 2000 Staggered price setting, translog preferences, and endogenous persistence. Journal of Monetary Economics 45, 657– 680.Google Scholar
Bergin P. & R.C. Feenstra 2001 Pricing-to-market, staggered contracts, and real exchange rate persistence. Journal of International Economics 54, 333– 359.Google Scholar
Blanchard O.J. 1983 Price asynchronization and price level inertia. In R. Dornbusch & M.H. Simonsen (eds.), Inflation, Debt, and Indexation , pp. 3– 24. Cambridge, MA: MIT Press.
Blanchard O. 1986 The wage price spiral. Quarterly Journal of Economics 101, 543– 565.Google Scholar
Blanchard O.J. & N. Kiyotaki 1987 Monopolistic competition and the effects of aggregate demand. American Economic Review 77, 647– 666.Google Scholar
Bordo M.D., C.J. Erceg & C.L. Evans 2000 Money, sticky wages, and the Great Depression. American Economic Review 90, 1447– 1463.Google Scholar
Chari V.V., P.J. Kehoe & E.R. McGrattan 2000 Sticky price models of the business cycle: Can the contract multiplier solve the persistence problem? Econometrica 68, 1151– 1180.Google Scholar
Christiano L.J., M. Eichenbaum & C.L. Evans 2001 Nominal Rigidity and the Dynamic Effect of a Shock to Monetary Policy. NBER working paper 8402.
Clark T.E. 1999 The responses of prices at different stages of production to monetary policy shocks. Review of Economics and Statistics 81, 420– 433.Google Scholar
Domowitz I.R., G. Hubbard & B.C. Petersen 1986 Business cycles and the relationship between concentration and price-cost margins. Rand Journal of Economics 17, 1– 17.Google Scholar
Domowitz I.R., G. Hubbard & B.C. Petersen 1988 Market structure and cyclical fluctuations in U.S. manufacturing. Review of Economics and Statistics 70, 55– 66.Google Scholar
Dotsey M. & R.G. King 2001 Pricing, Production and Persistence. NBER working paper 8407.
Edge R.M. 2000 Time-to-Build, Time-to-Plan, Habit-Persistence, and the Liquidity Effect. International Finance discussion paper 673, Board of Governors of the Federal Reserve System.
Edge R.M. 2002 The equivalence of wage and price staggering in monetary business cycle models. Review of Economic Dynamics 5, 559– 585.Google Scholar
Feenstra R.C. 1998 Integration of trade and disintegration of production in the global economy. Journal of Economic Perspectives 12, 31– 50.Google Scholar
Griffin P. 1992 The impact of affirmative action on labor demand: A test of some implications of the Le Chatelier principle. Review of Economics and Statistics 74, 251– 260.Google Scholar
Griffin P. 1996 Input demand elasticities for heterogeneous labor: Firm-level estimates and an investigation into the effects of aggregation. Southern Economic Journal 62, 889– 901.Google Scholar
Gust C.J. 1997 Staggered Price Contracts and Factor Immobilities: The Persistence Problem Revisited. Manuscript, Northwestern University.
Hanes C. 1999 Degrees of processing and changes in the cyclical behavior of prices in the United States, 1869–1990. Journal of Money, Credit, and Banking 31, 35– 53.Google Scholar
Hillberry R. & D. Hummels 2002 Explaining Home Bias in Consumption: The Role of Intermediate Input Trade. NBER working paper 9020.
Huang K.X.D. & Z. Liu 1998 Staggered Contracts and Business Cycle Persistence. Institute for Empirical Macroeconomics discussion paper 127, Federal Reserve Bank of Minneapolis.
Huang K.X.D. & Z. Liu 2000 Vertical International Trade as a Monetary Transmission Mechanism in an Open Economy. Cahiers de Recherche CREFE/CREFE working paper 107, CREE, Universitat du Quebec at Montreal.
Huang K.X.D. & Z. Liu 2001a Production chains and general equilibrium aggregate dynamics. Journal of Monetary Economics 48, 437– 462.Google Scholar
Huang K.X.D. & Z. Liu 2001b An Input–Output Channel of International Monetary Policy Transmissions. Mimeo, Federal Reserve Bank of Kansas City.
Huang K.X.D. & Z. Liu 2002 Staggered price setting, staggered wage setting, and business cycle persistence. Journal of Monetary Economics 49, 405– 433.Google Scholar
Huang K.X.D., Z. Liu & L. Phaneuf 2001 On the Transmission of Monetary Policy Shocks. Mimeo, Federal Reserve Bank of Kansas City.
Hummels D., D. Rapoport & K. Yi 1998 Vertical specialization and the changing nature of world trade. Federal Reserve Bank of New York Economic Policy Review 4 (2), 79– 99.Google Scholar
Hummels D., J. Ishii & K. Yi 2001 The nature and growth in vertical specialization in world trade. Journal of International Economics 54, 75– 96.Google Scholar
Jorgenson D.W., F.M. Gollop & B.M. Fraumeni 1987 Productivity and U.S Economic Growth.. Cambridge, MA: Harvard University Press.
Kimmel J. & T.J. Kniesner 1998 New evidence on labor supply: Employment versus hours elasticities by sex and marital status. Journal of Monetary Economics 42, 289– 302.Google Scholar
Linnemann L. 1999 Sectoral and aggregate estimates of the cyclical behavior of markups: Evidence from Germany, Weltwirtschaftliches Archiv. Review of World Economics 135, 480– 500.Google Scholar
Linnemann L. 2000 Intermediate Goods, Real Rigidity, and Output Persistence. Working paper, University of Cologne.
Mulligan C.B. 1999 Substitution over time: Another look at life cycle labor supply. In B.S. Bernanke & J.J. Rotemberg (eds.), NBER Macroeconomics Annual. Cambridge, MA: MIT Press.
Nevo A. 2001 Measuring market power in the ready-to-eat cereal industry. Econometrica 69, 307– 342.Google Scholar
Pencavel J. 1986 The labor supply of men: A survey. In O.C. Ashenfelter & L. Richard (eds.), Handbook of Labor Economics, vol. 1, pp. 3 –102. Amsterdam: North-Holland.
Rupert P., R. Rogerson & R. Wright 2000 Homework in Labor Economics: Household Production and Intertemporal Substitution. Journal of Monetary Economics 46, 557– 579.Google Scholar
Shapiro M.D. 1987 Measuring Market Power in U.S. Industry. NBER working paper 2212.
Taylor J.B. 1980 Aggregate dynamics and staggered contracts. Journal of Political Economy 88, 1– 23.Google Scholar
Taylor J.B. 1999 Staggered Price and Wage Setting in Macroeconomics. In J.B. Taylor & M. Woodford (eds.), Handbook of Macroeconomics, vol. 1, pp. 1009–1050. Amsterdam: North-Holland.
Yi K.M. 2003 Can vertical specialization explain the growth of world trade? Journal of Political Economy 111, 52– 102.Google Scholar