Financial Policy Working Papers

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)

Jangryoul Kim

Published February 1, 2003

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.