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

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Author Info
Collard, Fabrice (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES); UniversitŽ de Paris I, MAD)
Ertz, Guy (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES))

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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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Publisher 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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Related research
Keywords: Business Cycle; Money; Persistence; Nominal Wage Contracts;

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Find related papers by JEL classification:
E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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  2. 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!]
  3. ambler, s. & cardia, e. & phaneuf, l., 1991. "contracts de salaire, croissance endogene et fluctuations," Cahiers de recherche 9124, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
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  4. 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)
  5. 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. [Downloadable!] (restricted)
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  6. Eichenbaum, Martin S & Hansen, Lars Peter & Singleton, Kenneth J, 1988. "A Time Series Analysis of Representative Agent Models of Consumption and Leisure Choice under Uncertainty," The Quarterly Journal of Economics, MIT Press, vol. 103(1), pages 51-78, February. [Downloadable!] (restricted)
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  7. Kydland, Finn E & Prescott, Edward C, 1982. "Time to Build and Aggregate Fluctuations," Econometrica, Econometric Society, vol. 50(6), pages 1345-70, November. [Downloadable!] (restricted)
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  8. Steve Ambler & Alain Guay & Louis Phaneuf, 1999. "Wage Contracts and Labor Adjustment Costs as Endogenous Propagation Mechanisms," Cahiers de recherche CREFE / CREFE Working Papers 69, CREFE, Université du Québec à Montréal. [Downloadable!]
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  13. Sims, Christopher A., 1992. "Interpreting the macroeconomic time series facts : The effects of monetary policy," European Economic Review, Elsevier, vol. 36(5), pages 975-1000, June. [Downloadable!] (restricted)
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  14. Lucas, Robert E, Jr, 1978. "Asset Prices in an Exchange Economy," Econometrica, Econometric Society, vol. 46(6), pages 1429-45, November. [Downloadable!] (restricted)
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Cited by:
(explanations, 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.)

  1. Jean-Pascal Bénassy, 2005. "Competitiveness, market power and price stickiness: A paradox and a resolution," PSE Working Papers 2005-49, PSE (Ecole normale supérieure). [Downloadable!]
  2. Jean-Pascal Bénassy, 2006. "Dynamic models with non clearing markets," PSE Working Papers 2006-26, PSE (Ecole normale supérieure). [Downloadable!]
  3. Jean-Pascal BENASSY, 2003. "Staggered contracts and persistence : microeconomic foundations and macroeconomic dynamics," Discussion Papers (REL - Recherches Economiques de Louvain) 2003021, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES). [Downloadable!]
  4. Martial Dupaigne, 2002. "Travail posté et durée d'utilisation des équipements dans les fluctuations économiques," Annales d'Economie et de Statistique, ADRES, issue 66, pages 10, Avril-Jui. [Downloadable!]
  5. Jean-Pascal Benassy, 2003. "Output and Inflation Dynamics under Price and Wage Staggering Analytical Results," Annales d'Economie et de Statistique, ADRES, issue 69, pages 01, Janvier-M. [Downloadable!]
  6. Jean-Pascal Bénassy, 2003. "Staggered contracts and persistence : microeconomic foundations and macroeconomic dynamics," Recherches économiques de Louvain, De Boeck Université, vol. 69(2), pages 125-144. [Downloadable!]
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