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Sticky Price Models of the Business Cycle: Can the Contract Multiplier Solve the Persistence Problem?

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  • V. V. Chari
  • Patrick J. Kehoe
  • Ellen R. McGrattan

Abstract

The purpose of this paper is to construct a quantitative equilibrium model with price setting and use it to ask whether staggered price setting can generate persistent output fluctuations following monetary shocks. We construct a business cycle version of a standard sticky price model in which imperfectly competitive firms set nominal prices in a staggered fashion. We assume that prices are exogenously sticky for a short period of time. Persistent output fluctuations require endogenous price stickiness in the sense that firms choose not to change prices very much when they can do so. We find the amount of endogenous stickiness to be small. As a result, we find that such a model cannot generate persistent movements in output following monetary shocks.

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Bibliographic Info

Article provided by Econometric Society in its journal Econometrica.

Volume (Year): 68 (2000)
Issue (Month): 5 (September)
Pages: 1151-1180

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Handle: RePEc:ecm:emetrp:v:68:y:2000:i:5:p:1151-1180

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References

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  1. Rotemberg, Julio J., 1996. "Prices, output, and hours: An empirical analysis based on a sticky price model," Journal of Monetary Economics, Elsevier, vol. 37(3), pages 505-533, June.
  2. Cho, Jang-Ok & Cooley, Thomas F, 1995. "The Business Cycle with Nominal Contracts," Economic Theory, Springer, vol. 6(1), pages 13-33, June.
  3. Laurence M. Ball & David Romer, 1987. "Are Prices Too Sticky?," NBER Working Papers 2171, National Bureau of Economic Research, Inc.
  4. Chari, V V & Christiano, Lawrence J & Kehoe, Patrick J, 1994. "Optimal Fiscal Policy in a Business Cycle Model," Journal of Political Economy, University of Chicago Press, vol. 102(4), pages 617-52, August.
  5. repec:nbr:nberre:0126 is not listed on IDEAS
  6. Ellen R. McGrattan, 1993. "Solving the stochastic growth model with a finite element method," Staff Report 164, Federal Reserve Bank of Minneapolis.
  7. Lucas, Robert Jr., 1972. "Expectations and the neutrality of money," Journal of Economic Theory, Elsevier, vol. 4(2), pages 103-124, April.
  8. Miles S. Kimball, 1995. "The Quantitative Analytics of the Basic Neomonetarist Model," NBER Working Papers 5046, National Bureau of Economic Research, Inc.
  9. Robert E. Lucas, Jr. & Michael Woodford, 1993. "Real Effects of Monetary Shocks in an Economy with Sequential Purchases," NBER Working Papers 4250, National Bureau of Economic Research, Inc.
  10. Blanchard, Olivier Jean & Kiyotaki, Nobuhiro, 1987. "Monopolistic Competition and the Effects of Aggregate Demand," American Economic Review, American Economic Association, vol. 77(4), pages 647-66, September.
  11. King, Robert G & Watson, Mark W, 1996. "Money, Prices, Interest Rates and the Business Cycle," The Review of Economics and Statistics, MIT Press, vol. 78(1), pages 35-53, February.
  12. Michael Woodford, 1996. "Control of the Public Debt: A Requirement for Price Stability?," NBER Working Papers 5684, National Bureau of Economic Research, Inc.
  13. Kenneth D. West, 1987. "On the Interpretation of Near Random-Walk Behavior in GNP," NBER Working Papers 2364, National Bureau of Economic Research, Inc.
  14. Lee E. Ohanian & Alan C. Stockman, 1994. "Short-run effects on money when some prices are sticky," Economic Quarterly, Federal Reserve Bank of Richmond, issue Sum, pages 1-24.
  15. Taylor, John B, 1980. "Aggregate Dynamics and Staggered Contracts," Journal of Political Economy, University of Chicago Press, vol. 88(1), pages 1-23, February.
  16. Susanto Basu, 1994. "Intermediate Goods and Business Cycles: Implications for Productivity and Welfare," NBER Working Papers 4817, National Bureau of Economic Research, Inc.
  17. Olivier J. Blanchard, 1982. "Price Asynchronization and Price Level Inertia," NBER Working Papers 0900, National Bureau of Economic Research, Inc.
  18. Yun, Tack, 1996. "Nominal price rigidity, money supply endogeneity, and business cycles," Journal of Monetary Economics, Elsevier, vol. 37(2-3), pages 345-370, April.
  19. Phelps, Edmund S & Taylor, John B, 1977. "Stabilizing Powers of Monetary Policy under Rational Expectations," Journal of Political Economy, University of Chicago Press, vol. 85(1), pages 163-90, February.
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  1. Advanced Monetary Theory and Policy (ECON 447)
  2. Quantitative Macroeconomics and Real Business Cycles (QM&RBC)

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