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Real Effects of Nominal shocks: a 2-sector Dynamic Model with Slow Capital Adjustment and Money-in-the-utility

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  • Péter Benczúr

    ()
    (Magyar Nemzeti Bank)

Abstract

This paper develops a two-sector model to study the e.ect and incidence of nominal shocks (fiscal or exchange rate policies) on sectors and factors of production. I adopt a classical twosector model of a small open economy and enrich its structure with gradual investment and a preference for real money holdings. An expansive nominal shock (fiscal expansion or a nominal appreciation) leads to increased spending (due to the role of money), which pushes nontraded prices up (with gradual capital adjustment, the short-term transformation curve is nonlinear). This translates into changes in factor rewards, capital labor ratios and sector-level employment of capital and labor. Higher nontraded prices lead to extra domestic income, validating some of the initial excess spending. This propagation mechanism leads to a persistent real e.ect (on relative prices, factor rewards, capital accumulation) of nominal shocks, which disappears gradually through money outflow (trade deficit). I also draw parallels with the NATREX approach of equilibrium real exchange rates and the literature on exchange rate based stabilizations.

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File URL: http://english.mnb.hu/Root/Dokumentumtar/MNB/Kiadvanyok/mnbhu_mnbfuzetek/mnbhu_MF2003_9/wp2003_9.pdf
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Bibliographic Info

Paper provided by Magyar Nemzeti Bank (the central bank of Hungary) in its series MNB Working Papers with number 2003/9.

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Length: 46 pages
Date of creation: 2003
Date of revision:
Handle: RePEc:mnb:wpaper:2003/9

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Related research

Keywords: two-sector growth model; money-in-the-utility; q-theory; real effects of nominal shocks; endogenous pass-through.;

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Cited by:
  1. Balazs Vonnak, 2008. "The Hungarian monetary transmission mechanism: an assessment," BIS Papers chapters, in: Bank for International Settlements (ed.), Transmission mechanisms for monetary policy in emerging market economies, volume 35, pages 235-257 Bank for International Settlements.

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