The theoretical and empirical relevance of staggered wage contract models

Chapter one. Empirical properties of staggered wage contract models with multiple durations. By generating nominal rigidities within a rational expectations framework, the staggered wage contract model provides a potentially useful means of evaluating the real effects of alternative monetary stabilization policies (i.e. Taylor 1980; Dornbusch 1982; DeLong and Summers 1986). The purpose of this chapter is to formulate and estimate a generalized staggered contract model which yields reasonable values of the structural parameters, a high degree of empirical accuracy, and some useful implications for monetary stabilization policy. The generalized staggered contract model formulated here allows for a diversity of contract lengths as well as an empirically reasonable system of aggregate demand determination. Maximum likelihood estimation using quarterly U.S. data (1971-1988) on aggregate wages and real GNP indicates that the generalized model overcomes the empirical inconsistencies found in the original staggered contracts model. In other words, the generalized model fits the data as well as an unrestricted vector autoregression--an unusual achievement among macroeconomic models with rational expectations.;Chapter two. Monetary policy analysis in a general equilibrium model with wage contracts. Previous research on general equilibrium models (i.e. Robert Lucas 1978; Kydland and Prescott 1982) has demonstrated the value of such models in understanding aggregate economic behavior, but has implicitly or explicitly assumed that changes in the money supply have no real effects. The purpose of this paper is to develop and estimate a stochastic general equilibrium model in which monetary policy does affect real output and employment. The primary structural feature of the model is that firms and workers sign multi-period labor contracts with a fixed nominal wage rate and a flexible employment level. The paper combines this feature with specifications for utility, production, and central bank policy, and then derives the conditions of the rational expectations equilibrium. Using these equilibrium conditions, full-information maximum likelihood estimation is performed using U.S. aggregate wage and output data. The estimation results reported here are promising: the model fits the data relatively well, and yields reasonable parameter estimates and intuitively plausible evaluations of alternative monetary policy rules.;Chapter three. Directions for future research. Analysis of potential modifications and extensions of Chapters 1 and 2.