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The Role Of Money Demand In A Business Cycle Model With Staggered Wage Contracts

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Author Info
Rafael Gerke
Jens Rubart

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Abstract

The question of the main determinants of persistent responses due to nominal shocks captures, at least since Chari et al. (2000), a major part of the recent macroeconomic debate. However, the question whether sticky wages and/or sticky prices are sufficient for persistent reactions of key economic variables remains open. In the present model, the authors allow for nominal rigidities due to Taylor-like wage setting as well as price adjustment costs. However, as the analysis illustrates, smoothing marginal costs seems crucial to derive a contract multiplier; wage staggering alone is not sufficient. Without considering a more specific analysis of factor market frictions, the study enforces a point made by Erceg (1997) by analyzing the structure of money demand. In particular, it analyzes a 'standard' consumption-based money demand function by varying the interest rate elasticity of money demand, as well as the steady state rate of money holdings. Our results show that the persistence of the output/price dynamics can be affected crucially by the form of the implicit money demand function. In particular, it is shown that staggered wage contracts have to be accompanied by a sufficiently low interest rate elasticity, otherwise the model fails to reproduce reasonable responses of real variables.

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Publisher Info
Article provided by Icfai Press in its journal The Icfai University Journal of Monetary Economics.

Volume (Year): IV (2006)
Issue (Month): 2 (May)
Pages: 52-72
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Handle: RePEc:icf:icfjmo:v:04:y:2006:i:2:p:52-72

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  1. 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. [Downloadable!] (restricted)
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  3. Christopher J. Erceg, 1997. "Nominal wage rigidities and the propagation of monetary disturbances," International Finance Discussion Papers 590, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  4. Ascari, Guido & Rankin, Neil, 2002. "Staggered wages and output dynamics under disinflation," Journal of Economic Dynamics and Control, Elsevier, vol. 26(4), pages 653-680, April. [Downloadable!] (restricted)
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  5. Cho, Jang-Ok & Cooley, Thomas F, 1995. "The Business Cycle with Nominal Contracts," Economic Theory, Springer, vol. 6(1), pages 13-33, June.
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  6. Taylor, John B, 1980. "Aggregate Dynamics and Staggered Contracts," Journal of Political Economy, University of Chicago Press, vol. 88(1), pages 1-23, February. [Downloadable!] (restricted)
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  8. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 1998. "Monetary Policy Shocks: What Have We Learned and to What End?," NBER Working Papers 6400, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  9. Fischer, Stanley, 1979. "Capital Accumulation on the Transition Path in a Monetary Optimizing Model," Econometrica, Econometric Society, vol. 47(6), pages 1433-39, November. [Downloadable!] (restricted)
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  12. Ireland, Peter N., 1997. "A small, structural, quarterly model for monetary policy evaluation," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 47(1), pages 83-108, December. [Downloadable!] (restricted)
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  14. Ascari, Guido, 2000. "Optimising Agents, Staggered Wages and Persistence in the Real Effects of Money Shocks," Economic Journal, Royal Economic Society, vol. 110(465), pages 664-86, July. [Downloadable!] (restricted)
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  15. Rochelle M. Edge, 2002. "The Equivalence of Wage and Price Staggering in Monetary Business Cycle Models," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 5(3), pages 559-585, July. [Downloadable!] (restricted)
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  16. Guido Ascari, 2003. "Price/Wage Staggering and Persistence: A Unifying Framework," Journal of Economic Surveys, Blackwell Publishing, vol. 17(4), pages 511-540, 09. [Downloadable!] (restricted)
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  18. Julio Rotemberg & Michael Woodford, 1997. "An Optimization-Based Econometric Framework for the Evaluation of Monetary Policy," NBER Chapters, in: NBER Macroeconomics Annual 1997, Volume 12, pages 297-361 National Bureau of Economic Research, Inc. [Downloadable!]
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  22. Michael T. Kiley, 1997. "Staggered price setting and real rigidities," Finance and Economics Discussion Series 1997-46, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
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  25. Rafael Gerke, 2001. "Nominal rigidities and the dynamic effects of a monetary shock," Darmstadt Discussion Papers in Economics 107, Institut für Volkswirtschaftslehre (Department of Economics), Technische Universität Darmstadt (Darmstadt University of Technology). [Downloadable!]
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  27. Katharine G. Abraham & John C. Haltiwanger, 1995. "Real Wages and the Business Cycle," Journal of Economic Literature, American Economic Association, vol. 33(3), pages 1215-1264, September. [Downloadable!] (restricted)
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