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Sticky-price models and the natural rate hypothesis

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  • Andres, Javier
  • Lopez-Salido, J. David
  • Nelson, Edward

Abstract

A major criticism of standard specifications of price adjustment in models for monetary policy analysis is that they violate the natural rate hypothesis by allowing output to differ from potential in steady state. In this paper we estimate a dynamic optimizing business cycle model whose price-setting behavior satisfies the natural rate hypothesis. The price-adjustment specifications we consider are the sticky-information specification of Mankiw and Reis (2002) and the indexed contracts of Christiano, Eichenbaum, and Evans (2005). Our empirical estimates of the real side of the economy are similar whichever price adjustment specification is chosen. Consequently, the alternative model specifications deliver similar estimates of the U.S. output gap series, but the empirical behavior of the gap series differs substantially from standard gap estimates.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Monetary Economics.

Volume (Year): 52 (2005)
Issue (Month): 5 (July)
Pages: 1025-1053

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Handle: RePEc:eee:moneco:v:52:y:2005:i:5:p:1025-1053

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Web page: http://www.elsevier.com/locate/inca/505566

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  1. Lawrence J. Christiano & Martin Eichenbaum & Charles Evans, 2001. "Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy," NBER Working Papers 8403, National Bureau of Economic Research, Inc.
  2. Christopher J. Erceg & Dale W. Henderson & Andrew T. Levin, 1999. "Optimal monetary policy with staggered wage and price contracts," International Finance Discussion Papers 640, Board of Governors of the Federal Reserve System (U.S.).
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