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Input-Output Structure and Nominal Staggering: The Persistence Problem Revisited

This paper re-examines the conventional wisdom on the equivalence of staggered-wage setting and staggered-price setting in generating persistent real effects of aggregate demand shocks in a dynamic general equilibrium framework with an input-output production structure. Under staggered-wage setting, a relative wage consideration of households induces sluggish wage adjustments and thus sluggish price adjustments as well, just as in the case with no input-output connections. Under staggered-price setting, relative wages are constant, but the presence of the input-output structure creates a real wage effect which prevents nominal wages from deviating too much from the sticky intermediate input prices, resulting in an endogenous nominal wage rigidity; at the same time, the stickiness in the intermediate input prices translates directly into the sluggishness in marginal cost movements, reinforcing the real wage effect to increase the rigidity in firms' pricing decisions. Thus, while not helping the staggered-wage setting, the input-output structure improves the ability of the staggered-price setting in generating persistence. As a result, the conventional wisdom may continue to hold for some reasonable parameter values.