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Stochastic Nominal Wage Contracts in a Cash-in-Advance model

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  • Fabrice COLLARD

    (GREMAQ-CNRS, Toulouse)

  • Guy ERTZ

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

Abstract

The aim of this article is to assess the ability of Calvo (1983) type nominal wage contract to generate a positive and long-lasting hump-shaped response of output to a monetary stimulus, as suggested in empirical studies. To this end, we develop a simple cash-in-advance model, in which stochastic nominal wage contracts are introduced. This reduces the negative efFect of the so-called inflation tax such that monetary shocks hzve a positive hump-shaped effect on output. The variance decomposition analysis suggests that monetary shocks explain up to 40% of the total variance of output in the first quarter and have a long lasting effect, in our calibrated economy (namely the German economy). Further, the model also mimics the correlation between output and inflation and real balances observed in Germany. We also propose an evaluation of the effects of variations in the mean duration of contracts on these indicators.

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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 (REL - Recherches Economiques de Louvain) with number 2000032.

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Length: 22
Date of creation: 01 Sep 2000
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Handle: RePEc:ctl:louvre:2000032

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

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  1. 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.
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  8. Gray, Jo Anna, 1976. "Wage indexation: A macroeconomic approach," Journal of Monetary Economics, Elsevier, Elsevier, vol. 2(2), pages 221-235, April.
  9. 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.
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  14. V. V. Chari & Patrick J. Kehoe & Ellen R. McGrattan, 1998. "Sticky price models of the business cycle: can the contract multiplier solve the persistence problem?," Staff Report, Federal Reserve Bank of Minneapolis 217, Federal Reserve Bank of Minneapolis.
  15. 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.
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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, HAL halshs-00590433, HAL.
  3. Jean-Pascal Bénassy, 2005. "Competitiveness, market power and price stickiness: A paradox and a resolution," PSE Working Papers, HAL halshs-00590559, HAL.
  4. 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.

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