The past work of the investigator on business cycles has proceeded along two related lines. The first has been theoretical, focussing on models of nominal price and wage setting under imperfect competition and their implications for macroeconomic fluctuations. The other has been empirical, focussing on the origin and the transmission mechanism of shocks on macroeconomic fluctuations. The completed work has led to a better understanding of the reaction time of prices to wages and wages to prices. The nature of the interactions between price decisions, it was found, can lead to aggregate nominal price rigidities. The present research plan continues the basic monopolistically competitive framework, but with some shift in focus toward sectoral evidence and the relation between sectoral and aggregate fluctuations. Within the projected disaggregated formulations, it will be possible to consider the effects of both sector and aggregate shocks on sector output, prices, wages, and employment. Some of the results already obtained suggest that productivity shocks play a particularly important role in the sectoral fluctuation of these variables. The planned extensions of the original study will help to reveal the facts about local shocks, whether from the supply or the demand side, and the nature of their relations across sectors. The focus on wage setting also will enhance our understanding of its role in the dynamic adjustment process.
