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

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  • Michael Gail

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Abstract

Recently macroeconomists have intensified their efforts to develop models that are able to generate persistent reactions of real variables to monetary shocks in stochastic DGE models with nominal rigidities. This has proven to be quite difficult in models with price staggering only. Most papers show that output is above steady state only as long as prices are fixed for the firms. In this article 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. Persistent reactions emerge only with a high value of the elasticity of labor supply with respect to the real wage \textit{and} an interest rate sensitive money demand function. CIA-models generally create more persistency than MIU-models. In the CIA-setup a CRRA utility function generates more persistence than GHH preferences. The results highlight the importance of the way money is introduced in a New Neoclassical Synthesis model.

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Bibliographic Info

Paper provided by Universität Siegen, Fakultät Wirtschaftswissenschaften, Wirtschaftsinformatik und Wirtschaftsrecht in its series Volkswirtschaftliche Diskussionsbeiträge with number 96-01.

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Length: 51 pages
Date of creation: Jun 2001
Date of revision: 14 Feb 2003
Handle: RePEc:sie:siegen:96-01

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Keywords: Monetary Policy; New Neoclassical Synthesis; Sticky Prices; Persistency;

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Cited by:
  1. Michael Gail, 2002. "Persistency and Money Demand Distortions in a Stochastic DGE Model with Sticky Prices and Capital," Computing in Economics and Finance 2002 302, Society for Computational Economics.

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