Relative Wage Concern and the Keynesian Contract Multiplier

Recent quantitative dynamic general equilibrium models have cast serious doubts on the explanatory power of staggered wage/price setting in accounting for both output and inflation persistence. We enlarge a dynamic general equilibrium model with staggered wages by incorporating Keynesian relative wage concern on the part of workers. In contrast to previous models of staggered wages/prices, both output and inflation persistence is a robust finding of the model. Persistence results hold for all the sensible parameterisations