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Nominal Rigidities, Monetary Policy and Pigou Cycles

  • Stéphane Auray
  • Paul Gomme
  • Shen Guo

A chief goal of the Pigou cycle literature is to generate a boom in response to news of a future increase in productivity, and a bust if this improvement does not in fact take place. We nd that monetary policy can generate Pigou cycles in a two sector model with durables and non-durables, and nominal price rigidities { even when the Ramsey-optimal policy displays no such cycles. Estimated interest rate rules are a good t to data simulated under the Ramsey policy, implying that policymakers could come close to replicating the Ramsey-optimal policy.

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Article provided by Royal Economic Society in its journal The Economic Journal.

Volume (Year): (2013)
Issue (Month): (05)
Pages: 455-473

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Handle: RePEc:ecj:econjl:v::y:2013:i::p:455-473
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