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Stochastic Nominal Wage Contracts in a Cash-in-Advance model

Author

Listed:
  • Fabrice COLLARD

    (GREMAQ-CNRS, Toulouse)

  • Guy ERTZ

    (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES))

Abstract

The aim of this article is to assess the ability of Calvo (1983) type nominal wage contract to generate a positive and long-lasting hump-shaped response of output to a monetary stimulus, as suggested in empirical studies. To this end, we develop a simple cash-in-advance model, in which stochastic nominal wage contracts are introduced. This reduces the negative efFect of the so-called inflation tax such that monetary shocks hzve a positive hump-shaped effect on output. The variance decomposition analysis suggests that monetary shocks explain up to 40% of the total variance of output in the first quarter and have a long lasting effect, in our calibrated economy (namely the German economy). Further, the model also mimics the correlation between output and inflation and real balances observed in Germany. We also propose an evaluation of the effects of variations in the mean duration of contracts on these indicators.

Suggested Citation

  • Fabrice COLLARD & Guy ERTZ, 2000. "Stochastic Nominal Wage Contracts in a Cash-in-Advance model," Discussion Papers (REL - Recherches Economiques de Louvain) 2000032, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
  • Handle: RePEc:ctl:louvre:2000032
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Jean-Pascal Bénassy, 2006. "Dynamic models with non clearing markets," PSE Working Papers halshs-00590433, HAL.
    2. Bénassy, Jean-Pascal, 2002. "Conférence François-Albert Angers (2002)," L'Actualité Economique, Société Canadienne de Science Economique, vol. 78(4), pages 423-457, Décembre.
    3. Jean-Pascal Bénassy, 2005. "Competitiveness, market power and price stickiness: A paradox and a resolution," PSE Working Papers halshs-00590559, HAL.
    4. Jean-Pascal Bénassy, 2003. "Staggered contracts and persistence : microeconomic foundations and macroeconomic dynamics," Recherches économiques de Louvain, De Boeck Université, vol. 69(2), pages 125-144.

    More about this item

    Keywords

    Business Cycle; Money; Persistence; Calyo Type Nominal Wage Contracts;

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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