Staggered Contracts Models of Business Cycle: How Much Nominal Rigidity Do We Have?

Banking and Policy Working Paper 2-03

This draft: February, 2003; First draft: October, 2002 [364k pdf]

Abstract

This paper presents a monetary business cycle model embodying arbitrary degrees of nominal rigidities in goods and labor markets. Nominal rigidities are introduced in the form of staggered contracts. The structural parameters of the model go through formal reconciliation
with data series via maximum likelihood estimation. The estimation results stand in favor of wage stickiness, in the sense that i) the average duration of contracts is longer in labor market; and ii) nominal wage rigidities are crucial for the model's performance in fitting actual U.S. data.

The author is an economic analyst in the special studies and policy section of the Federal Reserve Bank of Minneapolis. The views expressed are those of the author and do not necessarily reflect the views of the Federal Reserve Bank of Minneapolis, the Board of Governors, or the Federal Reserve System.

The author welcomes your comments on this paper.