This paper provides new evidence that models of the monetary transmission mechanism should be consistent with at least the following facts. In response to a contractionary monetary policy shock, the aggregate price level responds very little, aggregate output falls, interest rates initially rise, real wages decline, though by a modest amount, and profits fall. The paper argues that neither sticky price nor limited participation models can convincingly account for these facts. The key failing of the sticky price model is that it implies profits rise after a contractionary monetary policy shock. This finding is robust to a variety of perturbations of the benchmark sticky price model that we consider. In contrast, the limited participation model can account for all of the facts mentioned above. But it can do so only if one is willing to assume a high labor supply elasticity (2) and a high average markup (40%). The shortcomings of both models reflect the absence of other frictions, such as wage contracts, which dampen movements in the marginal cost of production after a monetary policy shock.
Download Info
To download:
If you experience problems downloading a file, check if you have the
proper application to
view it first. Information about this may be contained
in the File-Format links below. In case of further problems read
the IDEAS help
file. Note that these files are not on the IDEAS
site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Publisher Info
Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number
5804.
Length: Date of creation: Oct 1996 Date of revision: Publication status: published as Christiano, Lawrence J., Martin Eichenbaum and Charles L. Evans. "Sticky Price And Limited Participation Models Of Money: A Comparison," European Economic Review, 1997, v41(6,Jun), 1201-1249. Handle: RePEc:nbr:nberwo:5804
Note: EFG ME Contact details of provider: Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A. Phone: 617-868-3900 Email: Web page: http://www.nber.org More information through EDIRC
For technical questions regarding this item, or to correct its listing, contact: ().
Find related papers by JEL classification: E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
This item is featured on the following reading lists:
References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
Killingsworth, Mark R. & Heckman, James J., 1987.
"Female labor supply: A survey,"
Handbook of Labor Economics,
in: O. Ashenfelter & R. Layard (ed.), Handbook of Labor Economics, edition 1, volume 1, chapter 2, pages 103-204
Elsevier.
[Downloadable!] (restricted)
Cited by: (explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.) This item has more than 25 citations. To prevent cluttering this page, these citations are listed on a separate page.