Location of Repository

Do Nominal Rigidities Matter for the Transmission of Technology Shocks?

By Zheng Liu and Louis Phaneuf


A commonly held view is that nominal rigidities are important for the transmission of monetary policy shocks. We argue that they are also important for understanding the dynamic effects of technology shocks, especially on labor hours, wages, and prices. Based on a dynamic general equilibrium framework, our closed-form solutions reveal that a pure sticky-price model predicts correctly that hours decline following a positive technology shock, but fails to generate the observed gradual rise in the real wage and the near-constance of the nominal wage; a pure sticky-wage model does well in generating slow adjustments in the nominal wage, but it does not generate plausible dynamics of hours and the real wage. A model with both types of nominal rigidities is more successful in replicating the empirical evidence about hours, wages and prices. This finding is robust for a wide range of parameter values, including a relatively small Frisch elasticity of hours and a relatively high frequency of price reoptimization that are consistent with microeconomic evidence.Technology shock, nominal rigidities, monetary policy

OAI identifier:

Suggested articles



  1. (1997). An Optimization-Based Econometric Framework for the Evaluation of Monetary Policy.”
  2. (2008). Five Facts About Prices: A Reevaluation of
  3. (1999). Handbook of macroeconomics.
  4. (1996). Input Demand Elasticities for Heterogeneous Labor: Firm-Level Estimates and An Investigation Into the Effects of Aggregation.”
  5. Is the Technology-Driven Real Business Cycle Hypothesis Dead? Shocks and Aggregate Fluctuations Revisited.”
  6. (2004). Some Evidence on the Importance of Sticky Prices.”
  7. (1983). Staggered Contracts in a Utility-Maximizing Framework.”
  8. (2008). State-Dependent or Time-Dependent Pricing: Does It Matter for Recent U.S.
  9. (2004). Technology Shocks and Aggregate Fluctuations: How Well Does the RBC Model Fit Postwar U.S. Data?” NBER Macreoconomics Annual,
  10. Technology Shocks and Labor Market Dynamics: Some Evidence and Theory.”
  11. (1999). Technology, Employment,and the Business Cycle: Do Technology Shocks Explain Aggregate Fluctuations?” American Economic Review,
  12. (1992). The Impact of Affirmative Action on Labor Demand: A Test of
  13. (1986). The Labor Supply of Men: A Survey.”
  14. Trend Breaks, Long-Run Restrictions, and the Contractionary Effects of
  15. Zheng “Staggered Price Setting, Staggered Wage Setting,

To submit an update or takedown request for this paper, please submit an Update/Correction/Removal Request.