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Sticky Prices, Limited Participation, or Both?

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  • Niki X. Papadopoulou

    () (Central Bank of Cyprus)

Abstract

This paper investigates the micro mechanisms by which monetary policy affects and is transmitted through the US economy, by developing a unified, dynamic, stochastic, general equilibrium model that nests two classes of models. The first sticky prices and the second limited participation. Limited participation is incorporated by assuming that households are faced with quadratic portfolio adjustment costs. Monetary policy is characterized by a generalized Taylor rule with interest rate smoothing. The model is calibrated and investigates whether the unified model performs better in replicating empirical stylized facts, than the models that have only sticky price or limited participation. The unified model replicates the second moments of the data better than the other two types of models. It also improves on the ability of the sticky price model to deliver the hump-shaped response of output and inflation. Moreover, it also delivers on the ability of the limited participation model to replicate the fall in profits and wages, after a contractionary monetary policy.

Suggested Citation

  • Niki X. Papadopoulou, 2008. "Sticky Prices, Limited Participation, or Both?," Working Papers 2008-4, Central Bank of Cyprus.
  • Handle: RePEc:cyb:wpaper:2008-4
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    File URL: http://www.centralbank.gov.cy/media/pdf/NPWPE_No4_062008_.pdf
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Francesco Zanetti, 2003. "Non-Walrasian Labor Market and the European Business Cycle," Boston College Working Papers in Economics 574, Boston College Department of Economics, revised 20 May 2004.
    2. Zanetti, Francesco, 2011. "Labor market institutions and aggregate fluctuations in a search and matching model," European Economic Review, Elsevier, vol. 55(5), pages 644-658, June.
    3. Nuno Alves, 2003. "The Distribution of Liquidity in a Monetary Union with Different Portfolio Rigidities," Working Papers w200306, Banco de Portugal, Economics and Research Department.
    4. Sandra Gomes, 2004. "Monetary Policy in a Currency Union with National Price Asymmetries," Working Papers w200416, Banco de Portugal, Economics and Research Department.
    5. Patureau, Lise, 2007. "Pricing-to-market, limited participation and exchange rate dynamics," Journal of Economic Dynamics and Control, Elsevier, vol. 31(10), pages 3281-3320, October.
    6. Fabio Ghironi, 2002. "Endogenously persistent output dynamics: A puzzle for the sticky-price model?," Boston College Working Papers in Economics 527, Boston College Department of Economics.

    More about this item

    Keywords

    Monetary policy; sticky prices; Taylor rule; DSGE model;

    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
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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