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Aggregation and Stabilization Policy in a Multi-Contract Economy

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  • Alan S. Blinder
  • N. Gregory Mankiw

Abstract

This paper presents a model of a multi-sector economy in which each sector is characterized by a different type of wage or price stickiness. The various sectors experience the same exogenous shocks and have the same money supply. The analysis shows demand shocks pose no serious problems for stabilization policy. In contrast, supply shocks force the policymaker to choose between stability in one sector and stability in another. The analysis also shows the economy cannot be usefully aggregated into a single sector model. Such an aggregation misleads the economist as to the economy's underlying structure and obscures the tradeoffs the policymaker must confront. In particular, a feedback rule chosen on the basis of an aggregate model could be better or worse than a passive policy.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 0873.

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Date of creation: Apr 1982
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Publication status: published as Blinder, Alan S. and N. Gregory Mankiw. "Aggregation and Stabilization Policy in a Multi-Contract Economy." Journal of Monetary Economics, Vol. 13, No. 1, (January 1984), pp. 67-86.
Handle: RePEc:nbr:nberwo:0873

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  1. Branson, William H. & Rotemberg, Julio J., 1980. "International adjustment with wage rigidity," European Economic Review, Elsevier, Elsevier, vol. 13(3), pages 309-332, May.
  2. Brunner, Karl & Meltzer, Allan H., 1976. "The Phillips curve," Carnegie-Rochester Conference Series on Public Policy, Elsevier, Elsevier, vol. 1(1), pages 1-18, January.
  3. Jeffrey D. Sachs, 1979. "Wages, Profits, and Macroeconomic Adjustment: A Comparative Study," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 10(2), pages 269-332.
  4. Blinder, Alan S, 1982. "Inventories and Sticky Prices: More on the Microfoundations of Macroeconomics," American Economic Review, American Economic Association, American Economic Association, vol. 72(3), pages 334-48, June.
  5. Lucas, Robert Jr, 1976. "Econometric policy evaluation: A critique," Carnegie-Rochester Conference Series on Public Policy, Elsevier, Elsevier, vol. 1(1), pages 19-46, January.
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Cited by:
  1. Cooley, Thomas F. & Hansen, Gary D., 1998. "The role of monetary shocks in equilibrium business cycle theory: Three examples," European Economic Review, Elsevier, Elsevier, vol. 42(3-5), pages 605-617, May.
  2. Joshua Aizenman & Jacob A. Frenkel, 1986. "Sectorial Wages and the Real Exchange Rate," NBER Working Papers 1801, National Bureau of Economic Research, Inc.
  3. John V. Duca & David D. VanHoose, 1998. "The rise of goods-market competition and the fall of nominal wage contracting: endogenous wage contracting in a multisector economy," Working Papers, Federal Reserve Bank of Dallas 9805, Federal Reserve Bank of Dallas.
  4. Peneva, Ekaterina, 2011. "Some evidence on factor intensity and price rigidity," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 35(10), pages 1652-1658, October.
  5. Georgios Chortareas & Christos Mavrodimitrakis, 2011. "Fiscal Policies and Monetary Leadership in a Monetary Union with a Deficit-Concerned Central Bank," Central European Journal of Economic Modelling and Econometrics, CEJEME, CEJEME, vol. 3(1), pages 1-24, March.
  6. Habib Ahmed & Stephen M. Miller, 1996. "Monetary and Exchange Rate Policy in Multisectorial Economies," Working papers, University of Connecticut, Department of Economics 1996-11, University of Connecticut, Department of Economics.
  7. Duca, John V. & Vanhoose, David D., 1998. "The Rise of Goods-Market Competition and the Decline in Wage Indexation: A Macroeconomic Approach," Journal of Macroeconomics, Elsevier, Elsevier, vol. 20(3), pages 579-598, July.
  8. Gangopadhyay, Partha & Gangopadhyay, Renu, 2008. "Flexible reservation prices and price inflexibility," Economic Modelling, Elsevier, Elsevier, vol. 25(3), pages 499-511, May.
  9. David D. VanHoose, 2004. "The New Open Economy Macroeconomics: A Critical Appraisal," Open Economies Review, Springer, Springer, vol. 15(2), pages 193-215, 04.

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