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Stochastic Nominal Wage Contacts in a Cash-in-Advance Model

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  • Collard, Fabrice

    (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES); Université de Paris I, MAD)

  • Ertz, Guy

    (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES))

Abstract

We build a simple cash-in-advance model for the German economy, in which we introduce stochastic nominal wage contracts. This allows to weaken the negative effect of the inflation tax such that monetary shocks exert a positive effect on output dynamics. The nominal wage contract model is able to mimic the correlation of inflation and real balances with output. It also lowers the standard deviation of inflation relative to that of output. Further, the variance decomposition analysis indicates that in this setting, monetary shocks explain between 30% and 45% of output volatility in the first quarter. Moreover, it indicates that this model generates a long lasting effect of monetary shocks on output dynamics.

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Bibliographic Info

Paper provided by Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES) in its series Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) with number 1997017.

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Length: 18
Date of creation: 01 Oct 1996
Date of revision: 00 Jul 1997
Handle: RePEc:ctl:louvir:1997017

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Keywords: Business Cycle; Money; Persistence; Nominal Wage Contracts;

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  1. Steve Ambler & Alain Guay & Louis Phaneuf, 1999. "Wage Contracts and Labor Adjustment Costs as Endogenous Propagation Mechanisms," Cahiers de recherche CREFE / CREFE Working Papers, CREFE, Université du Québec à Montréal 69, CREFE, Université du Québec à Montréal.
  2. Guillermo A. Calvo, 1983. "Staggered Contracts and Exchange Rate Policy," NBER Chapters, in: Exchange Rates and International Macroeconomics, pages 235-258 National Bureau of Economic Research, Inc.
  3. Sims, Christopher A., 1992. "Interpreting the macroeconomic time series facts : The effects of monetary policy," European Economic Review, Elsevier, Elsevier, vol. 36(5), pages 975-1000, June.
  4. Miles S. Kimball, 1995. "The Quantitative Analytics of the Basic Neomonetarist Model," NBER Working Papers 5046, National Bureau of Economic Research, Inc.
  5. Timothy S. Fuerst, 1994. "Monetary and financial interaction in the business cycle," Proceedings, Federal Reserve Bank of Cleveland, Federal Reserve Bank of Cleveland, pages 1321-1353.
  6. Kydland, Finn E & Prescott, Edward C, 1982. "Time to Build and Aggregate Fluctuations," Econometrica, Econometric Society, Econometric Society, vol. 50(6), pages 1345-70, November.
  7. V. V. Chari & Patrick J. Kehoe & Ellen R. McGrattan, 1996. "Sticky Price Models of the Business Cycle: Can the Contract Multiplier Solve the Persistence Problem?," NBER Working Papers 5809, National Bureau of Economic Research, Inc.
  8. ambler, s. & cardia, e. & phaneuf, l., 1991. "contracts de salaire, croissance endogene et fluctuations," Cahiers de recherche, Centre interuniversitaire de recherche en économie quantitative, CIREQ 9124, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
  9. Peter Brandner & Klaus Neusser, 1992. "Business cycles in open economies: Stylized facts for Austria and Germany," Review of World Economics (Weltwirtschaftliches Archiv), Springer, Springer, vol. 128(1), pages 67-87, March.
  10. Michael T. Kiley, 1997. "Staggered price setting and real rigidities," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 1997-46, Board of Governors of the Federal Reserve System (U.S.).
  11. Martin S. Eichenbaum & Lars Peter Hansen & Kenneth J. Singleton, 1986. "A Time Series Analysis of Representative Agent Models of Consumption andLeisure Choice Under Uncertainty," NBER Working Papers 1981, National Bureau of Economic Research, Inc.
  12. Taylor, John B, 1980. "Aggregate Dynamics and Staggered Contracts," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 88(1), pages 1-23, February.
  13. Fuerst, Timothy S., 1992. "Liquidity, loanable funds, and real activity," Journal of Monetary Economics, Elsevier, Elsevier, vol. 29(1), pages 3-24, February.
  14. Hodrick, Robert J & Prescott, Edward C, 1997. "Postwar U.S. Business Cycles: An Empirical Investigation," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 29(1), pages 1-16, February.
  15. Lucas, Robert E, Jr, 1978. "Asset Prices in an Exchange Economy," Econometrica, Econometric Society, Econometric Society, vol. 46(6), pages 1429-45, November.
  16. Roger E. A. Farmer, 1999. "Macroeconomics of Self-fulfilling Prophecies, 2nd Edition," MIT Press Books, The MIT Press, The MIT Press, edition 2, volume 1, number 0262062038, December.
  17. Jang-Ok Cho, 1993. "Money and Business Cycle with One-Period Nominal Contracts," Canadian Journal of Economics, Canadian Economics Association, Canadian Economics Association, vol. 26(3), pages 638-59, August.
  18. Gray, Jo Anna, 1976. "Wage indexation: A macroeconomic approach," Journal of Monetary Economics, Elsevier, Elsevier, vol. 2(2), pages 221-235, April.
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Cited by:
  1. Jean-Pascal Bénassy, 2003. "Staggered contracts and persistence : microeconomic foundations and macroeconomic dynamics," Recherches économiques de Louvain, De Boeck Université, De Boeck Université, vol. 69(2), pages 125-144.
  2. Jean-Pascal Bénassy, 2006. "Dynamic models with non clearing markets," PSE Working Papers halshs-00590433, HAL.
  3. Bénassy, Jean-Pascal, 2002. "Conférence François-Albert Angers (2002)," L'Actualité Economique, Société Canadienne de Science Economique, Société Canadienne de Science Economique, vol. 78(4), pages 423-457, Décembre.
  4. Jean-Pascal Bénassy, 2005. "Competitiveness, market power and price stickiness: A paradox and a resolution," PSE Working Papers halshs-00590559, HAL.

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