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

TLDR: This paper present a model embodying moderate amounts of nominal rigidities which 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 which 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 of average duration three quarters, and variable capital utilization.

Figures

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 1: Model and Data Impulse Responses

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