0.2. Both CKM and Ascari argue that the microfounded value of 7 is too high
generate observed persistence following a monetary shock which raises doubts
over the Taylor model in this respect. In a general equilibrium setting, 7 is
determined by the fundamental parameters of the model according to (19). In
particular, its magnitude depends on the parameter governing risk aversion,
ηcc the labour supply elasticity, ηu 1 and the elasticity of substitution of
consumption goods θ which determines the elasticity of firm demand and the
markup from (3) and hence the markup (5).
With staggered price setting, Chari et al. (2000) find that with reasonable
parameter values, the value of 7 is bigger than one: in particular with σ = 1
7gkm = ηll + ηcc = 1∙2 > 1
However, for CKM the value of 7gkm could reasonably be much higher6: for
example with ηll = 4.5 and ηcc = 1, 7gkm = 5∙5∙ Huang and Liu (2002)
choose to set ηll = 2, so that 7gkm = 2∙
As has been argued by Huang and Liu (2002) staggered price setting
underestimates the persistence of output. The value of 7 with wage-setting
is much smaller. In our model, as in Ascari, with σ = 1,
7 Ascari = ηil + ηcc = 7GKM
1 + θηn 1 + θηn
Under our preferred calibration, 7gkm = 5.5, and 1 + θηll = 27, so that
7Ascan = Q∙2. The value of 7 under wage setting could arguably be much
smaller: some authors set θ = 1Q and combined with a smaller ηll = 2,
7 = 1/7 = Q∙14. Thus, our preferred calibration is almost the same as
Ascari, so for wage-setting we use the Ascari value of 7 = Q∙2∙
The lower value of 7 is significant and means that with staggered wages
the aggregate price level changes more slowly than with staggered prices. It
is thus inferred that staggered wage setting has greater potential to generate
persistence7. As a result, although in both mechanisms the equations are
essentially identical, they have different implications on persistence in a gen-
eral equilibrium framework. Whilst Ascari (2000) shows that output is more
6Since CKM were aiming to show that the staggered price model did not generate
enough peristence, they chose a value of 7ckm which was low to make the model as
persistent as it could reasonably be.
7This contradicts with the common view that both settings have similar implications
on persistence. Altough the equations are esentially the same. The the value of 7 differs
across settings. See Huang and Liu (2002) for further discussion.
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