On the Equivalence of Price and Wage Staggering: Extension and Implication for Persistence

Abstract

This paper examines the equivalence of staggered-price and staggered-wage models in generating persistence. Under certain parameter restrictions, I show that a sticky­ price model that includes firm specific Labor and labor adjustment costs is observationally equivalent to a sticky-wage model featuring habit in leisure with respect to all aggregate quantities and price inflation. Each form of labor stickiness interacts positively with the nominal rigidity with which it is combined to enhance output persistence. The results suggest that labor demand rigidity has a small impact on the propagation of monetary shocks to real activity. However, it plays an important role in shaping price dynamics. I also show that a sticky-wage model that assumes temporal substitution of leisure periods is able to match the empirical low persistence in wage inflation.