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Time-to-build approach in a sticky price, sticky wage optimizing monetary model

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  • Casares, Miguel

Abstract

One of the most significant characteristics of optimizing models is that the behavioral equations involved are typically forward looking, i.e. agents are concerned about the futures rather than the past. This creates difficulties when modelling some of the business-cycle patterns widely observed in modern economies. For example, it is not easy to obtain the delay in the response of the rate of inflation to a monetary shock. This paper shows that an optimizing monetary model with endogenous capital, sticky prices, sticky wages, and adjustment costs of investment, can replicate a lag in the maximum response of both output and inflation to an interest rate shock when taking into account a time-to-build requirement for investment projects. JEL Classification: E12, E22, E47

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Bibliographic Info

Paper provided by European Central Bank in its series Working Paper Series with number 0147.

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Date of creation: May 2002
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Handle: RePEc:ecb:ecbwps:20020147

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Citations

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Cited by:
  1. Lutz Weinke & Tommy Sveen, 2003. "Inflation and output dynamics with firm-owned capital," Economics Working Papers 702, Department of Economics and Business, Universitat Pompeu Fabra.
  2. Charlotta Groth & Hashmat Khan, 2007. "Investment adjustment costs: evidence from UK and US industries," Bank of England working papers 332, Bank of England.
  3. Tommy Sveen & Lutz Weinke, 2004. "Pitfalls in the modeling of forward-looking price setting and investment decisions," Economics Working Papers 773, Department of Economics and Business, Universitat Pompeu Fabra.
  4. Miguel Casares, 2007. "Firm-Specific or Household-Specific Sticky Wages in the New Keynesian Model?," International Journal of Central Banking, International Journal of Central Banking, vol. 3(4), pages 181-240, December.
  5. Francesco Lippi & Stefano Neri, 2004. "Information variables for monetary policy in a small structural model," DNB Staff Reports (discontinued) 120, Netherlands Central Bank.
  6. Tommy Sveen & Lutz Weinke, 2004. "New Perspectives on Capital and Sticky Prices," Working Paper 2004/03, Norges Bank.
  7. Kanda Naknoi & Michael Kumhof & Douglas Laxton, 2005. "On the Benefits of Exchange Rate Flexibility under Endogenous Tradedness of Goods," Computing in Economics and Finance 2005 405, Society for Computational Economics.
  8. Lippi, Francesco & Neri, Stefano, 2003. "Information Variables for Monetary Policy in a Small Structural Model of the Euro Area," CEPR Discussion Papers 4125, C.E.P.R. Discussion Papers.
  9. Tommy Sveen & Lutz Weinke, 2004. "Pitfalls in the Modelling of Forward-Looking Price Setting and Inverstment Behavior," Working Paper 2004/01, Norges Bank.
  10. Ronny Mazzocchi, 2013. "Scope and Flaws of the New Neoclassical Synthesis," DEM Discussion Papers 2013/13, Department of Economics and Management.

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