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Another Look at Sticky Prices and Output Persistence

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  • Wang, Peng-fei

    (Cornell U)

  • Wen, Yi

    (Cornell U)

Abstract

Price rigidity is the key mechanism for propagating business cycles in traditional Keynesian theory. Yet the New Keynesian literature has failed to show that sticky prices by itself can effectively propagate business cycles in general equilibrium. This situation may be a direct consequence of the notion that money-in-utility (MIU) and cash-in-advance (CIA) are equivalent mechanisms for generating money demand. They are not. We show that price rigidity in fact can (by itself) give rise to a powerful propagation mechanism of the business cycle under CIA constraint in standard New Keynesian general equilibrium models. In particular, we show that reasonable price stickiness can generate highly persistent, hump-shaped movements in output, investment and employment in response to either monetary or non-monetary shocks. Hence, whether or not price rigidity is responsible for output persistence (and the business cycle in general) is not a theoretical question, but an empirical one.

Suggested Citation

  • Wang, Peng-fei & Wen, Yi, 2004. "Another Look at Sticky Prices and Output Persistence," Working Papers 04-19, Cornell University, Center for Analytic Economics.
  • Handle: RePEc:ecl:corcae:04-19
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    Cited by:

    1. Wang, Pengfei & Wen, Yi, 2007. "Inflation dynamics: A cross-country investigation," Journal of Monetary Economics, Elsevier, vol. 54(7), pages 2004-2031, October.
    2. Ngotran, Duong, 2016. "The E-Monetary Theory," MPRA Paper 77206, University Library of Munich, Germany, revised 25 Feb 2017.
    3. Casares Miguel & Poutineau Jean-Christophe, 2011. "Short-Run and Long-Run Effects of Banking in a New Keynesian Model," The B.E. Journal of Macroeconomics, De Gruyter, vol. 11(1), pages 1-41, May.
    4. Auray, Stéphane & de Blas, Beatriz, 2013. "Investment, matching and persistence in a modified cash-in-advance economy," Journal of Economic Dynamics and Control, Elsevier, vol. 37(3), pages 591-610.
    5. Caleiro, António, 2009. "How upside down are political business cycles when there is output persistence," Research in Economics, Elsevier, vol. 63(1), pages 22-26, March.
    6. Auray, Stephane & de Blas, Beatriz, 2007. "On Stickiness, Cash in Advance, and Persistence," Working Papers in Economic Theory 2007/05, Universidad Autónoma de Madrid (Spain), Department of Economic Analysis (Economic Theory and Economic History).
    7. José Manuel Belbute & Leonardo Dia Massala & Júlio António Delgado, 2016. "Measuring Persistence in Inflation: Evidence For angola," South African Journal of Economics, Economic Society of South Africa, vol. 84(4), pages 594-606, December.
    8. Arnab Bhattacharjee & Christoph Thoenissen, 2005. "Money and Monetary Policy in Stochastic General Equilibrium Models," CDMA Working Paper Series 200511, Centre for Dynamic Macroeconomic Analysis, revised 15 Feb 2007.
    9. Belbute, José & Caleiro, António, 2009. "Measuring the Persistence on Consumption in Portugal," MPRA Paper 15116, University Library of Munich, Germany.
    10. Belbute, José & Caleiro, António, 2010. "Cross Country Evidence on Consumption Persistence," MPRA Paper 22008, University Library of Munich, Germany.
    11. Belbute, José Manuel, 2013. "Is the Euro-Area core price index really more persistent than the food and energy price indexes?," Research in Economics, Elsevier, vol. 67(4), pages 307-315.
    12. Yunus Aksoy & Henrique S Basso & Javier Coto Matinez, 2009. "Liquidity Effects and Cost Channels in Monetary Transmission," Birkbeck Working Papers in Economics and Finance 0902, Birkbeck, Department of Economics, Mathematics & Statistics.
    13. repec:eee:ecolet:v:160:y:2017:i:c:p:67-72 is not listed on IDEAS
    14. Arnab Bhattacharjee & Christoph Thoenissen, 2007. "Money and Monetary Policy in DSGE Models," Money Macro and Finance (MMF) Research Group Conference 2006 78, Money Macro and Finance Research Group.
    15. Jos� BELBUTE & Ant�nio CALEIRO, 2009. "Measuring Persistence On Consumption In Portugal," Journal of Applied Economic Sciences, Spiru Haret University, Faculty of Financial Management and Accounting Craiova, vol. 4(2(8)_ Sum).

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