Staggered wages and monetary policy : a dynamic general equilibrium approach
In the first chapter, first we review the famous Taylor (1979, 1980a) model of staggered wage setting and then we present original work in describing the structure of a dynamic general equilibrium model with staggered wage setting a la Taylor. This model is central to the thesis since the results presented in chapters 2, 3 and 4 are based on it. Moreover, also the models in chapters 5 and 6, while somewhat different, originate from it. Chapter 2 addresses the issue of superneutrality of money using the model presented in the previous chapter. It demonstrates that, once staggered wages are introduced in an optimising framework, a mild permanent change in the rate of growth of money could have substantial effects on the steady state aggregate level of output and welfare. Previous studies fail to reproduce these results because they consider restrictively simple utility and production functions. The model exhibits high costs of inflation and provides a rationale for the pursuit of price stability observed in western countries. Chapter 3 studies analytically the output costs of a reduction in monetary growth in the dynamic general equilibrium model with staggered wages of the previous chapters. We show that the introduction of microfoundations helps to resolve the puzzle recently raised by Laurence Ball (1994), namely that disinflation in staggered pricing models causes a boom. In our model disinflation, whether unanticipated or anticipated, unambiguously causes a slump. The analytical results are restricted to the tractable case (log-linearisation of the model around a zero steady state inflation), but a long appendix checks the robustness of these results through non-linear simulations. Chapter 4 investigates whether staggered wages could induce a high degree of persistence in the real effects of money shocks. We show how the parameters of Taylor's model depend upon the microeconomic fundamentals and the conduct of monetary policy. We conclude that high persistence is an unlikely outcome. Either sensible values of the microeconomic parameters or a moderate rate of underlying inflation imply a low degree of persistence. This is the persistence puzzle we referred to above. Furthermore, we show that: (i) the model is highly non-linear; (ii) the conduct of monetary policy affects the structural parameters of Taylor's wage setting equation, providing a clear example of the Lucas critique; (iii) the inertia of the system is inversely related to the level of average inflation. In Chapter 5 we incorporate explicit relative wage concern on the part of wage-setters into the dynamic general equilibrium model with staggered wages developed in the previous chapters. We then investigate the effects of money shocks on both inflation and output. In contrast to previous models of staggered wages/prices, output and inflation persistence are a robust finding of the model. Moreover, they hold for all the sensible parametrisations. Given the empirical evidence on relative wage concern, we conclude that this may be the missing piece in the money shocks persistence puzzle. Chapter 6 presents a unifying framework to analyse the ability of price versus wage staggering to generate persistence. The results are fairly general in that they derive from a stylised log-linear model which encompasses most of the microfounded models of price/wage staggering, found recently in the literature. The results highlight the importance of the underlying economic structure for the ability of staggered price/wage models to generate persistence of the real effects of money shocks.