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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.

Suggested Citation

  • Alan S. Blinder & N. Gregory Mankiw, 1982. "Aggregation and Stabilization Policy in a Multi-Contract Economy," NBER Working Papers 0873, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:0873
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    1. William H. Branson & Julio J. Rotemberg, 1991. "International Adjustment with Wage Rigidity," NBER Chapters, in: International Volatility and Economic Growth: The First Ten Years of The International Seminar on Macroeconomics, pages 13-44, National Bureau of Economic Research, Inc.
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    3. Fischer, Stanley, 1977. "Long-Term Contracts, Rational Expectations, and the Optimal Money Supply Rule," Journal of Political Economy, University of Chicago Press, vol. 85(1), pages 191-205, February.
    4. 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.
    5. Blinder, Alan S, 1982. "Inventories and Sticky Prices: More on the Microfoundations of Macroeconomics," American Economic Review, American Economic Association, vol. 72(3), pages 334-348, June.
    6. Lucas, Robert Jr, 1976. "Econometric policy evaluation: A critique," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 1(1), pages 19-46, January.
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    Citations

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    Cited by:

    1. Aizenman, Joshua & Frenkel, Jacob A, 1986. "Supply Shocks, Wage Indexation and Monetary Accommodation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 18(3), pages 304-322, August.
    2. Devadoss, Stephen, 1994. "Sluggish Price Adjustments And The Effectiveness Of Aggregate Demand Policies At The Sectoral Level," A.E. Research Series 305122, University of Idaho, Department of Agricultural Economics and Rural Sociology.
    3. Alho, Kari, . "Analysis of Financial Markets and Central Bank Policy in the Flow-of-Funds Framework. An Application to the Case of Finland," ETLA A, The Research Institute of the Finnish Economy, number 12.
    4. 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, vol. 20(3), pages 579-598, July.
    5. Devadoss, Stephen, 1994. "A Study Of Macro Rational Expectations Hypothesis Tests On Commodity Markets," A.E. Research Series 305120, University of Idaho, Department of Agricultural Economics and Rural Sociology.
    6. Aizenman, Joshua & Frenkel, Jacob A., 1988. "Sectorial wages and the real exchange rate," Journal of International Economics, Elsevier, vol. 24(1-2), pages 69-91, February.
    7. David D. VanHoose, 2004. "The New Open Economy Macroeconomics: A Critical Appraisal," Open Economies Review, Springer, vol. 15(2), pages 193-215, April.
    8. Ida, Daisuke, 2020. "Sectoral inflation persistence and optimal monetary policy," Journal of Macroeconomics, Elsevier, vol. 65(C).
    9. 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, Central European Journal of Economic Modelling and Econometrics, vol. 3(1), pages 1-24, March.
    10. Ahmed, Habib & Miller, Stephen M., 1997. "Monetary and exchange rate policy in multisectoral economies," Journal of Economics and Business, Elsevier, vol. 49(4), pages 321-334.
    11. William Luther, 2014. "Evenly rotating economy: A new modeling technique for an old equilibrium construct," The Review of Austrian Economics, Springer;Society for the Development of Austrian Economics, vol. 27(4), pages 403-417, December.
    12. Cooley, Thomas F. & Hansen, Gary D., 1998. "The role of monetary shocks in equilibrium business cycle theory: Three examples," European Economic Review, Elsevier, vol. 42(3-5), pages 605-617, May.
    13. Peneva, Ekaterina, 2011. "Some evidence on factor intensity and price rigidity," Journal of Economic Dynamics and Control, Elsevier, vol. 35(10), pages 1652-1658, October.
    14. Devadoss, Stephen, 1994. "Price Inertia: Money Supply And Price Changes," A.E. Research Series 305123, University of Idaho, Department of Agricultural Economics and Rural Sociology.
    15. Duca, John V. & Van Hoose, David D., 2001. "The Rise of Goods-Market Competition and the Fall of Nominal Wage Contracting: Endogenous Wage Contracting in a Multisector Economy," Journal of Macroeconomics, Elsevier, vol. 23(1), pages 1-29, January.
    16. Gangopadhyay, Partha & Gangopadhyay, Renu, 2008. "Flexible reservation prices and price inflexibility," Economic Modelling, Elsevier, vol. 25(3), pages 499-511, May.
    17. Devadoss, Stephen, 1994. "Freely Determined Versus Regulated Prices And The Policy Ineffectiveness Proposition," A.E. Research Series 305126, University of Idaho, Department of Agricultural Economics and Rural Sociology.
    18. Devadoss, Stephen, 1995. "Effects Of Fiscal Policies On U.S. Agriculture," A.E. Research Series 305138, University of Idaho, Department of Agricultural Economics and Rural Sociology.

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