1980/02/01 by John B. Taylor · 6 citations
Economics, Econometrics and Finance · #Monetary Policy and Economic Impact #Economic Theory and Policy #Economic theories and models #Economics #Persistence (discontinuity) #Business cycle #Wage #Unemployment #Lag #Inflation (cosmology) #Aggregate (composite) #Aggregate demand #Multiplier (economics) #Rational expectations #Econometrics #Monetary economics #Component (thermodynamics) #Inertia #Monetary policy #Labour economics #Macroeconomics #Computer science
paper · doi:10.1086/260845
openalex publication_date 1980/02/01 · openalex created_date 2025/10/10 · openalex updated_date 2026/08/03
Staggered wage contracts as short as 1 year are shown to be capable of generating the type of unemployment persistence which has been observed during postwar business cycles in the United States. A contract multiplier causes business cycles to persist beyond the length of the longest contract, and a diffusion of shocks across contracts causes the persistence to increase for several periods before diminishing. A persistence of inflation is also generated by the contracts. This persistence is represented as a reduced-form distributed-lag wage equation in which the lag coefficients have a pure-expectations component and an inertia component due to the overhang of outstanding contracts. Using rational expectations to separate these components suggests that aggregate demand may have a greater impact on inflation than the simple reduced-form estimates would indicate.