ABSTRACT
We compare in this chapter the relative abilities of price and wage staggering to produce output persistence. For that we construct a dynamic stochastic general equilibrium model, and integrate into it wage or price contracts à la Calvo ([3]). We derive explicit solutions for both the optimal wage and price contracts, and the resulting output and employment dynamics. It is found that usually, for the same average duration of contracts, price staggering will produce less persistence than wage staggering. The difference between the two depends crucially on the households’ labor supply.
