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Persistency and Money Demand Distortions in a Stochastic DGE Model with Sticky Prices and Capital

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  • Michael Gail

Abstract

This paper considers the implications of adding capital as a factor of production in a stochastic DGE model with sticky prices. Particular attention is given to the role of money demand and to the form of the utility function. I consider cash-in-advance- (CIA) as well as money-in-the-utility-function- (MIU) models, with CRRA and GHH preferences, to evaluate their ability to generate persistence. It is shown that even in a MIU-model with a GHH utility function and a high elasticity of labor supply with respect to the real wage the additional intertemporal substitution channel opened through capital accumulation does have a significant dampening influence on the persistence effects of monetary shocks. In a CIA-setup with GHH preferences the model can generate the liquidity effect. A multiplicatively separable CRRA utility function in the MIU-model cannot account for the observed persistent reactions of inflation and output either.

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Bibliographic Info

Paper provided by Society for Computational Economics in its series Computing in Economics and Finance 2002 with number 302.

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Date of creation: 01 Jul 2002
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Handle: RePEc:sce:scecf2:302

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Keywords: Monetary Policy; New Neoclassical Synthesis; Sticky Prices; Persistency; Real Business Cycle;

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  1. Ludger Linnemann, 1999. "Sectoral and aggregate estimates of the cyclical behavior of markups: Evidence from Germany," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 135(3), pages 480-500, September.
  2. Ali Dib & Louis Phaneuf, 2001. "An Econometric U.S. Business Cycle Model with Nominal and Real Rigidities," Cahiers de recherche CREFE / CREFE Working Papers 137, CREFE, Université du Québec à Montréal.
  3. Michael Dotsey & Robert G. King & Alexander L. Wolman, 1999. "State-Dependent Pricing And The General Equilibrium Dynamics Of Money And Output," The Quarterly Journal of Economics, MIT Press, vol. 114(2), pages 655-690, May.
  4. Michael Dotsey & Robert G. King, 2006. "Pricing, Production, and Persistence," Journal of the European Economic Association, MIT Press, vol. 4(5), pages 893-928, 09.
  5. Dixit, Avinash K & Stiglitz, Joseph E, 1977. "Monopolistic Competition and Optimum Product Diversity," American Economic Review, American Economic Association, vol. 67(3), pages 297-308, June.
  6. Michele Cavallo & Fabio Ghironi, 2000. "Net Foreign Assets and the Exchange Rate: Redux Revived," Boston College Working Papers in Economics 505, Boston College Department of Economics, revised 01 Feb 2002.
  7. repec:nbr:nberre:0126 is not listed on IDEAS
  8. Kevin X. D. Huang & Zheng Liu, 2001. "Input-Output Structure and Nominal Staggering: The Persistence Problem Revisited," Cahiers de recherche CREFE / CREFE Working Papers 145, CREFE, Université du Québec à Montréal.
  9. Robert King & Alexander L. Wolman, 1999. "What Should the Monetary Authority Do When Prices Are Sticky?," NBER Chapters, in: Monetary Policy Rules, pages 349-404 National Bureau of Economic Research, Inc.
  10. Taylor, John B, 1980. "Aggregate Dynamics and Staggered Contracts," Journal of Political Economy, University of Chicago Press, vol. 88(1), pages 1-23, February.
  11. Floden, Martin, 2000. "Endogenous monetary policy and the business cycle," European Economic Review, Elsevier, vol. 44(8), pages 1409-1429, August.
  12. K. Huang & Z. Liu & L. Phaneuf, . "Staggered contracts, intermediate goods and the dynamic effects of monetary shocks on output, inflation and real wages," Working Papers 2000-20, Utah State University, Department of Economics.
  13. Michael Gail, 2001. "Persistency and Money Demand Distortions in a Stochastic DGE Model with Sticky Prices," Volkswirtschaftliche Diskussionsbeiträge 96-01, Universität Siegen, Fakultät Wirtschaftswissenschaften, Wirtschaftsinformatik und Wirtschaftsrecht, revised 14 Feb 2003.
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