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The Role of Money Demand in a Business Cycle Model with Staggered Wage Contracts

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Author Info
Rafel Gerke () (Ehemalig Institut für Volkswirtschaftslehre (Department of Economics), Technische Universität Darmstadt (Darmstadt University of Technology))
Jens Rubart () (Institut für Volkswirtschaftslehre (Department of Economics), Technische Universität Darmstadt (Darmstadt University of Technology))

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Abstract

The question of the main determinants of persistent responses due to nominal shocks captures, at least since Chari et al. (2000), a major part of the recent macroeconomic debate. However, the question whether sticky wages and/or sticky prices are sufficient for persistent reactions of key economic variables remains open. In the present model we allow for nominal rigidities due to Taylor- like wage setting as well as price adjustment costs. However, as our analysis illustrates, smoothing marginal costs seems crucial to derive a contract multiplier, wage staggering alone is not sufficient. Without considering a more specific analysis of factor market frictions, we enforce a point made by Erceg (1997) by analyzing the structure of money demand. In particular, we analyze a `standard' consumption based money demand function by varying the interest rate elasticity of money demand as well as the steady state rate of money holdings. Our results show that the persistency of the output/price dynamics can be affected crucially by the form of the implicit money demand function. In particular, it is shown that staggered wage contracts have to be accompanied by a sufficiently low interest rate elasticity, otherwise the model fails to reproduce reasonable responses of real variables

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Publisher Info
Paper provided by Institut für Volkswirtschaftslehre (Department of Economics), Technische Universität Darmstadt (Darmstadt University of Technology) in its series Darmstadt Discussion Papers in Economics with number 142.

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Length: 25 pages
Date of creation: Feb 2005
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Handle: RePEc:tud:ddpiec:142

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Related research
Keywords: Monetary Policy Shocks; Sticky Prices; Staggered Wages; Money Demand;

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Find related papers by JEL classification:
E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money

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  1. Blanchard, Olivier Jean & Kiyotaki, Nobuhiro, 1987. "Monopolistic Competition and the Effects of Aggregate Demand," American Economic Review, American Economic Association, vol. 77(4), pages 647-66, September. [Downloadable!] (restricted)
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    Other versions:
  3. Christopher J. Erceg, 1997. "Nominal wage rigidities and the propagation of monetary disturbances," International Finance Discussion Papers 590, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
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  5. Ascari, Guido & Rankin, Neil, 2002. "Staggered wages and output dynamics under disinflation," Journal of Economic Dynamics and Control, Elsevier, vol. 26(4), pages 653-680, April. [Downloadable!] (restricted)
    Other versions:
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  19. Ascari, Guido, 2000. "Optimising Agents, Staggered Wages and Persistence in the Real Effects of Money Shocks," Economic Journal, Royal Economic Society, vol. 110(465), pages 664-86, July. [Downloadable!] (restricted)
    Other versions:
  20. Rochelle M. Edge, 2002. "The Equivalence of Wage and Price Staggering in Monetary Business Cycle Models," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 5(3), pages 559-585, July. [Downloadable!] (restricted)
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  21. Rafael Gerke, 2001. "Nominal rigidities and the dynamic effects of a monetary shock," Darmstadt Discussion Papers in Economics 107, Institut für Volkswirtschaftslehre (Department of Economics), Technische Universität Darmstadt (Darmstadt University of Technology). [Downloadable!]
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