Relative Wage Concern: The Missing Piece in the Contract Multiplier?

Recent research has cast serious doubts on the explanatory power of staggered wage/price setting to account for both output and inflation persistence following money shocks. This paper extends a dynamic general equilibrium model with wage staggering by incorporating relative wage concern on the part of workers. In sharp contrast to previous analyses, in this model both output and inflation dynamics exhibit substantial persistence. Moreover, persistence results hold for a wide range of parameterisations. Our results suggest that relative wage concern may be the missing piece in the money shock persistence puzzle