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Nominal wage rigidities and the propagation of monetary disturbances

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  • Christopher J. Erceg

Abstract

Recent research has challenged the ability of sticky price general equilibrium models to generate a contract multiplier, i.e., an effect of a monetary innovation on output that extends beyond the contract interval. We show that a simple dynamic general equilbrium model that includes "Taylor-style" (1980) wage and price contracts can account for a substantial contract multiplier under various assumptions about the structure of the capital market. Most interestingly, our results do not rely on a high intertemporal labor supply elasticity or elastic supply of capital: our preference specification is standard (logarithmic), and we can account for a strong contract multiplier even when the aggregate stock of capital is fixed. Finally, our analysis highlights the importance of the income elasticity of money demand in accounting for output persistence.

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File URL: http://www.federalreserve.gov/pubs/ifdp/1997/590/ifdp590.pdf
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Bibliographic Info

Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series International Finance Discussion Papers with number 590.

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Date of creation: 1997
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Handle: RePEc:fip:fedgif:590

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Related research

Keywords: Wages ; Econometric models;

References

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  23. 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.
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