Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy

TL;DR: In this article, the authors present a model embodying moderate amounts of nominal rigidities that accounts for the observed inertia in inflation and persistence in output, and the key features of their model are those that prevent a sharp rise in marginal costs after an expansionary shock to monetary policy.

Abstract: We present a model embodying moderate amounts of nominal rigidities that accounts for the observed inertia in inflation and persistence in output. The key features of our model are those that prevent a sharp rise in marginal costs after an expansionary shock to monetary policy. Of these features, the most important are staggered wage contracts that have an average duration of three quarters and variable capital utilization.

Summary

Introduction

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Figures

Figure 1: Model and Data Impulse Responses

Figure 4: Textbook Growth Model Specification, No Captital Utilization, No Investment Adjustment Costs, No Habit Persistence

Figure 3: AR(1) Money Growth, Flexible Prices, Flexible Wages

Figure 2: Price Level, Output and Money Stock

Figure 5: lambdaf = 1.05, static indexation (optimized)

Full text

Nominal Rigidities and the Dynamic
Effects of a Shock to Monetary Policy
By: Lawrence J. Christiano, Martin
Eichenbaum and Charles L. Evans
Federal Reserve Bank of Chicago
WP 2001-08

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