Persistency and Money Demand Distortions in a Stochastic DGE Model with Sticky Prices and Capital
AbstractThis 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 InfoPaper provided by Society for Computational Economics in its series Computing in Economics and Finance 2002 with number 302.
Date of creation: 01 Jul 2002
Date of revision:
Monetary Policy; New Neoclassical Synthesis; Sticky Prices; Persistency; Real Business Cycle;
Other versions of this item:
- Michael Gail, 2002. "Persistency and Money Demand Distortions in a Stochastic DGE Model with Sticky Prices and Capital," Volkswirtschaftliche DiskussionsbeitrÃ¤ge 103-02, Universität Siegen, Fakultät Wirtschaftswissenschaften, Wirtschaftsinformatik und Wirtschaftsrecht, revised 05 May 2003.
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
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