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Nominal Dynamics in Expected Market-Clearing Models

This paper investigates the relative performance of two expected market-clearing models vis-à-vis inflation and interest rates dynamics. It is shown that neither a limited participation model, nor a predetermined price model can completely explain the stylized facts regarding nominal dynamics. The two models display the desired properties for the contemporaneous responses to shocks. Yet the impulse response function of the interest rate in the predetermined price model is counterfactual. Both models fail to duplicate the cyclical properties of the nominal variables, making clear that the monetary non-neutrality they embody does not deliver the proper nominal dynamics, hence that passive monetary policy shall not be recommended in this respect. Ce papier étudie la performance relative de deux modèles d'équilibrage anticipé du marché par rapport aux dynamiques de l'inflation et des taux d'intérêt. Nous montrons que ni le modèle à participation limitée, ni le modèle à prix prédéterminés ne peuvent complètement expliquer les faits caractéristiques concernant les variables nominales. Les deux modèles ont les bonnes propriétés pour les réponses immédiates aux chocs. Pourtant, la fonction de réponses du taux d'intérêt est contraire aux faits dans le modèle à prix prédéterminés. Les deux modèles échouent dans la réplication des propriétés cycliques des variables nominales, indiquant clairement que le type de non-neutralité monétaire à l'oeuvre n'engendre pas les dynamiques nominales appropriées, et donc qu'une politique monétaire passive ne devrait pas être recommandée à cet égard.

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Paper provided by CREFE, Université du Québec à Montréal in its series Cahiers de recherche CREFE / CREFE Working Papers with number 126.

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Length: 23 pages
Date of creation: Dec 2000
Date of revision:
Handle: RePEc:cre:crefwp:126
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  1. Gali, J., 1996. "Technology, Employment, and the Business Cycle: Do Technology Shocks Explain Aggregate Fluctuations?," Working Papers 96-28, C.V. Starr Center for Applied Economics, New York University.
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  10. Blanchard, Olivier Jean & Quah, Danny, 1989. "The Dynamic Effects of Aggregate Demand and Supply Disturbances," American Economic Review, American Economic Association, vol. 79(4), pages 655-73, September.
  11. Fuerst, Timothy S., 1992. "Liquidity, loanable funds, and real activity," Journal of Monetary Economics, Elsevier, vol. 29(1), pages 3-24, February.
  12. Hairault, J.O. & Portier, F., 1992. "Money New-Keynesian Macroeconomics and the Business Cycles," Papiers d'Economie Mathématique et Applications 92.32, Université Panthéon-Sorbonne (Paris 1).
  13. Robert G. King & Mark W. Watson, 1995. "Money, prices, interest rates and the business cycle," Working Paper Series, Macroeconomic Issues 95-10, Federal Reserve Bank of Chicago.
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  17. Rotemberg, Julio J, 1982. "Sticky Prices in the United States," Journal of Political Economy, University of Chicago Press, vol. 90(6), pages 1187-1211, December.
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  22. repec:nbr:nberre:0126 is not listed on IDEAS
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  26. Cooley, Thomas F. & Hansen, Gary D., 1997. "Unanticipated Money," Economics Series 42, Institute for Advanced Studies.
  27. Thomas F. Cooley & Gary D. Hansen, 1997. "Unanticipated money growth and the business cycle reconsidered," Proceedings, Federal Reserve Bank of Cleveland, issue Nov, pages 624-652.
  28. Beaudry, Paul & Guay, Alain, 1996. "What do interest rates reveal about the functioning of real business cycle models?," Journal of Economic Dynamics and Control, Elsevier, vol. 20(9-10), pages 1661-1682.
  29. Taylor, John B, 1980. "Aggregate Dynamics and Staggered Contracts," Journal of Political Economy, University of Chicago Press, vol. 88(1), pages 1-23, February.
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  31. Cook, David, 1999. "The liquidity effect and money demand," Journal of Monetary Economics, Elsevier, vol. 43(2), pages 377-390, April.
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