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Sticky Prices, Limited Participation or Both?

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  • Niki Papadopoulou

Abstract

This paper investigates the micro mechanisms by which monetary policy affects and is transmitted through the U.S economy, by developing a unified, dynamic, stochastic, general equilibrium model that nests two classes of models. The first sticky prices and the second limited participation. Limited participation is incorporated by assuming that households’ are faced with quadratic portfolio adjustment costs. Monetary policy is characterized by a generalized Taylor rule with interest rate smoothing. The model is calibrated and investigates whether the unified model performs better in replicating empirical stylized facts, than the models that have only sticky price or limited participation. The unified model replicates the second moments of the data better than the other two types of models. It also improves on the ability of the sticky price model to deliver the hump-shaped response of output and inflation. Moreover, it also delivers on the ability of the limited participation model to replicate the fall in profits and wages, after a contractionary monetary policy.

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Paper provided by Business School - Economics, University of Glasgow in its series Working Papers with number 2004_3.

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Date of creation: Mar 2004
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Handle: RePEc:gla:glaewp:2004_3

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Cited by:
  1. Francesco Zanetti, 2003. "Non-Walrasian Labor Market and the European Business Cycle," Boston College Working Papers in Economics 574, Boston College Department of Economics, revised 20 May 2004.
  2. Zanetti, Francesco, 2011. "Labor market institutions and aggregate fluctuations in a search and matching model," European Economic Review, Elsevier, vol. 55(5), pages 644-658, June.
  3. Nuno Alves, 2003. "The Distribution of Liquidity in a Monetary Union with Different Portfolio Rigidities," Working Papers w200306, Banco de Portugal, Economics and Research Department.
  4. Fabio Ghironi, 2002. "Endogenously persistent output dynamics: A puzzle for the sticky-price model?," Boston College Working Papers in Economics 527, Boston College Department of Economics.
  5. Sandra Gomes, 2004. "Monetary Policy in a Currency Union with National Price Asymmetries," Working Papers w200416, Banco de Portugal, Economics and Research Department.
  6. Patureau, Lise, 2007. "Pricing-to-market, limited participation and exchange rate dynamics," Journal of Economic Dynamics and Control, Elsevier, vol. 31(10), pages 3281-3320, October.

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