Optimising Agents, Staggered Wages and Persistence in the Real Effects of Money Shocks

In this paper we incorporate Taylor’s (1979) staggered wage setting into an optimising dynamic general equilibrium framework to study whether staggered wages could induce a high degree of persistence in the real effects of money shocks. We conclude that high persistence is an unlikely outcome. Sensible values of the microeconomic parameters and/or a moderate rate of underlying inflation imply a low degree of persistence. Furthermore, once explicit microfoundations are taken into account, we show that: (i) the model is highly non-linear; (ii) the inertia of the system is inversely related to the level of average inflation