Advanced Search
MyIDEAS: Login

Sticky Prices versus Monetary Frictions: An Estimation of Policy Trade-Offs

Contents:

Author Info

  • S. Boragan Aruoba
  • Frank Schorfheide

Abstract

We develop a two-sector monetary model with a centralized and decentralized market. Activities in the centralized market resemble those in a standard New Keynesian economy with price rigidities. In the decentralized market agents engage in bilateral exchanges for which money is essential. This paper is the first to formally estimate such a model, evaluate its fit based on postwar US data, and assess its money demand properties. Steady-state welfare calculations reveal that the distortions created by the monetary friction may be of similar magnitude as the distortions created by the New Keynesian friction. (JEL C54, E12, E31, E41, E52)

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.aeaweb.org/articles.php?doi=10.1257/mac.3.1.60
Download Restriction: no

File URL: http://www.aeaweb.org/aej/mac/data/2009-0177_data.zip
Download Restriction: no

File URL: http://www.aeaweb.org/aej/mac/app/2009-0177_app.pdf
Download Restriction: Access to full text is restricted to AEA members and institutional subscribers.

Bibliographic Info

Article provided by American Economic Association in its journal American Economic Journal: Macroeconomics.

Volume (Year): 3 (2011)
Issue (Month): 1 (January)
Pages: 60-90

as in new window
Handle: RePEc:aea:aejmac:v:3:y:2011:i:1:p:60-90

Note: DOI: 10.1257/mac.3.1.60
Contact details of provider:
Email:
Web page: http://www.aeaweb.org/aej-macro
More information through EDIRC

Order Information:
Web: http://www.aeaweb.org/subscribe.html

Related research

Keywords:

Other versions of this item:

Find related papers by JEL classification:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Stephanie Schmitt-Grohé & Martín Uribe, 2006. "Optimal Inflation Stabilization in a Medium-Scale Macroeconomic Model," Working Papers Central Bank of Chile 410, Central Bank of Chile.
  2. Alexander L. Wolman, 2001. "A primer on optimal monetary policy with staggered price-setting," Economic Quarterly, Federal Reserve Bank of Richmond, issue Fall, pages 27-52.
  3. Roberto M. Billi & George A. Kahn, 2008. "What is the optimal inflation rate?," Economic Review, Federal Reserve Bank of Kansas City, issue Q II, pages 5-28.
  4. Marco Del Negro & Frank Schorfheide, 2006. "Forming priors for DSGE models (and how it affects the assessment of nominal rigidities)," Working Paper 2006-16, Federal Reserve Bank of Atlanta.
  5. Aubhik Khan & Robert G. King & Alexander L. Wolman, 2003. "Optimal Monetary Policy," Review of Economic Studies, Oxford University Press, vol. 70(4), pages 825-860.
  6. Thomas Lubik & Frank Schorfheide, 2005. "A Bayesian Look at New Open Economy Macroeconomics," Economics Working Paper Archive 521, The Johns Hopkins University,Department of Economics.
  7. S. Boragan Aruoba & Sanjay K. Chugh, 2006. "Optimal fiscal and monetary policy when money is essential," International Finance Discussion Papers 880, Board of Governors of the Federal Reserve System (U.S.).
  8. hafedh bouakez & emanuela cardia, 2003. "Habit Formation and the Persistence of Monetary Shocks," Computing in Economics and Finance 2003 72, Society for Computational Economics.
  9. Rocheteau, Guillaume & Rupert, Peter & Shell, Karl & Wright, Randall, 2008. "General equilibrium with nonconvexities and money," Journal of Economic Theory, Elsevier, vol. 142(1), pages 294-317, September.
  10. Guido Ascari & Tiziano Ropele, 2007. "Optimal monetary policy under low trend inflation," Temi di discussione (Economic working papers) 647, Bank of Italy, Economic Research and International Relations Area.
  11. Robert G. King & Alexander L. Wolman, 1996. "Inflation Targeting in a St. Louis Model of the 21st Century," NBER Working Papers 5507, National Bureau of Economic Research, Inc.
  12. Frederic S. Mishkin & Klaus Schmidt-Hebbel D., 2006. "Monetary Policy Under Inflation Targeting: An Introduction," Journal Economía Chilena (The Chilean Economy), Central Bank of Chile, vol. 9(3), pages 5-17, December.
  13. Ricardo Lagos & Randall Wright, 2002. "A unified framework for monetary theory and policy analysis," Working Paper 0211, Federal Reserve Bank of Cleveland.
  14. S. Boragan Aruoba & Christopher J. Waller & Randall Wright, 2007. "Money and capital," Working Paper 0714, Federal Reserve Bank of Cleveland.
  15. Thomas Sargent & Noah Williams & Tao Zha, 2004. "Shocks and government beliefs: the rise and fall of American inflation," Working Paper 2004-22, Federal Reserve Bank of Atlanta.
  16. Thomas Doan & Robert B. Litterman & Christopher A. Sims, 1986. "Forecasting and conditional projection using realistic prior distribution," Staff Report 93, Federal Reserve Bank of Minneapolis.
  17. Frank Schorfheide, 2005. "Learning and Monetary Policy Shifts," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 8(2), pages 392-419, April.
  18. Andrew T. Levin & Alexei Onatski & John C. Williams & Noah Williams, 2005. "Monetary policy under uncertainty in micro-founded macroeconometric models," Working Paper Series 2005-15, Federal Reserve Bank of San Francisco.
  19. Sims, Christopher A & Zha, Tao, 1998. "Bayesian Methods for Dynamic Multivariate Models," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(4), pages 949-68, November.
  20. Barry Z. Cynamon & Donald H. Dutkowsky & Barry E. Jones, 2006. "Redefining the Monetary Agggregates: A Clean Sweep," Eastern Economic Journal, Eastern Economic Association, vol. 32(4), pages 661-672, Fall.
  21. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 2005. "Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy," Journal of Political Economy, University of Chicago Press, vol. 113(1), pages 1-45, February.
  22. James H. Stock & Mark W. Watson, 1991. "A simple estimator of cointegrating vectors in higher order integrated systems," Working Paper Series, Macroeconomic Issues 91-3, Federal Reserve Bank of Chicago.
  23. Aleksander Berentsen & Gabriele Camera, 2004. "Money, Credit, and Banking," 2004 Meeting Papers 473, Society for Economic Dynamics.
  24. Smets, Frank & Wouters, Raf, 2007. "Shocks and frictions in US business cycles: a Bayesian DSGE approach," Working Paper Series 0722, European Central Bank.
  25. Richard Rogerson, 2010. "Indivisible Labor, Lotteries and Equilibrium," Levine's Working Paper Archive 250, David K. Levine.
  26. Randall Wright & Guillame Rocheteau, 2003. "Money in Search Equilibrium, in Competitive Equilibrium, and in Competitive Search Equilibrium," Levine's Bibliography 666156000000000302, UCLA Department of Economics.
  27. Ireland, Peter N, 2004. "Money's Role in the Monetary Business Cycle," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 36(6), pages 969-83, December.
  28. Alejandro Justiniano & Giorgio E. Primiceri, 2008. "The Time-Varying Volatility of Macroeconomic Fluctuations," American Economic Review, American Economic Association, vol. 98(3), pages 604-41, June.
  29. Guillaume Rocheteau & Christopher Waller, 2005. "Bargaining and the value of money," Working Paper 0501, Federal Reserve Bank of Cleveland.
  30. Javier Andres & J. David López-Salido & Edward Nelson, 2004. "Tobin's imperfect asset substitution in optimizing general equilibrium," Working Papers 2004-003, Federal Reserve Bank of St. Louis.
  31. Ball, Laurence, 2001. "Another look at long-run money demand," Journal of Monetary Economics, Elsevier, vol. 47(1), pages 31-44, February.
  32. Favara, Giovanni & Giordani, Paolo, 2002. "Reconsidering the Role of Money for Output, Prices and Interest Rates," Working Paper Series in Economics and Finance 514, Stockholm School of Economics.
  33. Sanjay K. Chugh & S. Boragan Aruoba, 2009. "Money and Optimal Capital Taxation," 2009 Meeting Papers 69, Society for Economic Dynamics.
  34. Javier Andres & J. David López-Salido & Edward Nelson, 2005. "Sticky-price models and the natural rate hypothesis," Working Papers 2005-018, Federal Reserve Bank of St. Louis.
  35. BOUAKEZ, Hafed & CARDIA Emanuela & RUGE-MURCIA, Francisco, 2005. "The Transmission of Monetary Policy in a Multi-Sector Economy," Cahiers de recherche 2005-16, Universite de Montreal, Departement de sciences economiques.
  36. Frank Schorfheide, 2000. "Loss function-based evaluation of DSGE models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 15(6), pages 645-670.
  37. Ian Christensen & Ali Dib, 2008. "The Financial Accelerator in an Estimated New Keynesian Model," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 11(1), pages 155-178, January.
  38. Roberto M. Billi, 2007. "Optimal inflation for the U.S," Research Working Paper RWP 07-03, Federal Reserve Bank of Kansas City.
  39. Gary Hansen, 2010. "Indivisible Labor and the Business Cycle," Levine's Working Paper Archive 233, David K. Levine.
  40. Ben Craig & Guillaume Rocheteau, 2006. "Inflation and welfare: a search approach," Policy Discussion Papers, Federal Reserve Bank of Cleveland, issue Jan.
  41. Giorgio Primiceri, 2005. "Why Inflation Rose and Fell: Policymakers' Beliefs and US Postwar Stabilization Policy," NBER Working Papers 11147, National Bureau of Economic Research, Inc.
  42. Goldfeld, Stephen M. & Sichel, Daniel E., 1990. "The demand for money," Handbook of Monetary Economics, in: B. M. Friedman & F. H. Hahn (ed.), Handbook of Monetary Economics, edition 1, volume 1, chapter 8, pages 299-356 Elsevier.
  43. Pierce, David A., 1980. "Data revisions with moving average seasonal adjustment procedures," Journal of Econometrics, Elsevier, vol. 14(1), pages 95-114, September.
  44. Robert E. Lucas, Jr., 2000. "Inflation and Welfare," Econometrica, Econometric Society, vol. 68(2), pages 247-274, March.
  45. Lucas, Robert E., 1988. "Money demand in the United States: A quantitative review," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 29(1), pages 137-167, January.
  46. Christopher J. Waller, 2009. "Random matching and money in the neoclassical growth model: some analytical results," Working Papers 2009-034, Federal Reserve Bank of St. Louis.
  47. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
  48. Guerron-Quintana, Pablo A., 2009. "Money demand heterogeneity and the great moderation," Journal of Monetary Economics, Elsevier, vol. 56(2), pages 255-266, March.
  49. repec:cdl:ucsbec:355814 is not listed on IDEAS
  50. Rabanal, Pau & Rubio-Ramirez, Juan F., 2005. "Comparing New Keynesian models of the business cycle: A Bayesian approach," Journal of Monetary Economics, Elsevier, vol. 52(6), pages 1151-1166, September.
  51. Marvin Goodfriend & Robert King, 1997. "The New Neoclassical Synthesis and the Role of Monetary Policy," NBER Chapters, in: NBER Macroeconomics Annual 1997, Volume 12, pages 231-296 National Bureau of Economic Research, Inc.
  52. King, Robert G., 1988. "Money demand in the United States: A quantitative review," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 29(1), pages 169-172, January.
  53. Kiyotaki, Nobuhiro & Wright, Randall, 1989. "On Money as a Medium of Exchange," Journal of Political Economy, University of Chicago Press, vol. 97(4), pages 927-54, August.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Ahrens, Steffen & Snower, Dennis J., 2012. "Envy, Guilt, and the Phillips Curve," IZA Discussion Papers 6302, Institute for the Study of Labor (IZA).
  2. Jagjit S. Chadha & Luisa Corrado & Sean Holly, 2013. "A Note on Money and the Conduct of Monetary Policy," CEIS Research Paper 279, Tor Vergata University, CEIS, revised 13 May 2013.
  3. Seitz, Franz & Schmidt, Markus A., 2014. "Money in modern macro models: A review of the arguments," OTH im Dialog: Weidener Diskussionspapiere 37, University of Applied Sciences Amberg-Weiden (OTH).
  4. Stephen D. Williamson & Randall Wright, 2010. "New Monetarist Economics: methods," Staff Report 442, Federal Reserve Bank of Minneapolis.
  5. Frank Schorfheide, 2012. "EconomicDynamics Interviews Frank Schorfheide on DSGE Model Estimation," EconomicDynamics Newsletter, Review of Economic Dynamics, vol. 13(2), April.
  6. Eric R. Sims, 2012. "Inflation Expectations and Readiness to Spend, Cross-Sectional Evidence," Working Papers 015, University of Notre Dame, Department of Economics, revised Mar 2012.
  7. Ahmed, Shahzad & Ahmed, Waqas & Khan, Sajawal & Pasha, Farooq & Rehman, Muhammad, 2012. "Pakistan Economy DSGE Model with Informality," MPRA Paper 53135, University Library of Munich, Germany.
  8. Nicoletta Batini & Paul Levine & Emanuela Lotti & Bo Yang, 2011. "Informality, Frictions and Monetary Policy," School of Economics Discussion Papers 0711, School of Economics, University of Surrey.
  9. Olivier Coibion & Yuriy Gorodnichenko & Johannes F. Wieland, 2010. "The Optimal Inflation Rate in New Keynesian Models," NBER Working Papers 16093, National Bureau of Economic Research, Inc.
  10. Henning Weber, 2011. "Optimal inflation and firms' productivity dynamics," Kiel Working Papers 1685, Kiel Institute for the World Economy.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:aea:aejmac:v:3:y:2011:i:1:p:60-90. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Jane Voros) or (Michael P. Albert).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.