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Monetary Policy Rules, Real Rigidity and Endogenous Persistence

The bulk of literature on real rigidity attempts to identify sources of real rigidity in market imperfections while assuming that the money supply is exogenously set. This paper shows that monetary policy preferences affect the responsiveness of marginal cost to output and through this channel they are shown to determine (i) the degree of real rigidity and (ii) the degree of endogenous persistence. We find that substantial levels of real rigidity and persistence can be generated using plausible monetary parameter values and without relying on additional sources of real rigidity.

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Paper provided by Economics, The University of Manchester in its series The School of Economics Discussion Paper Series with number 0221.

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Date of creation: 2002
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Handle: RePEc:man:sespap:0221
Contact details of provider: Postal: Manchester M13 9PL
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Web page: http://www.socialsciences.manchester.ac.uk/subjects/economics/

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  1. Taylor, John B., 1999. "The robustness and efficiency of monetary policy rules as guidelines for interest rate setting by the European central bank," Journal of Monetary Economics, Elsevier, vol. 43(3), pages 655-679, June.
  2. Clarida, R. & Gali, J. & Gertler, M., 1998. "Monetary Policy Rules and Macroeconomic Stability: Evidence and some Theory," Working Papers 98-01, C.V. Starr Center for Applied Economics, New York University.
  3. George J. Bratsiotis & Christopher Martin, . "Stabilisation, Policy Targets and Unemployment in Imperfectly Competitive Economies," Economics and Finance Discussion Papers 98-08, Economics and Finance Section, School of Social Sciences, Brunel University.
  4. Peter N. Ireland, 2002. "Endogenous Money or Sticky Prices?," NBER Working Papers 9390, National Bureau of Economic Research, Inc.
  5. Hairault, Jean-Olivier & Portier, Franck, 1993. "Money, New-Keynesian macroeconomics and the business cycle," European Economic Review, Elsevier, vol. 37(8), pages 1533-1568, December.
  6. Mark Gertler & Jordi Gali & Richard Clarida, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," Journal of Economic Literature, American Economic Association, vol. 37(4), pages 1661-1707, December.
  7. Michael T. Kiley, 1996. "Endogenous price stickiness and business cycle persistence," Finance and Economics Discussion Series 96-23, Board of Governors of the Federal Reserve System (U.S.).
  8. Olivier Jean Blanchard & Stanley Fischer, 1989. "Lectures on Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262022834, June.
  9. Devereux, Michael B. & Yetman, James, 2002. "Menu costs and the long-run output-inflation trade-off," Economics Letters, Elsevier, vol. 76(1), pages 95-100, June.
  10. Mankiw, N Gregory, 1985. "Small Menu Costs and Large Business Cycles: A Macroeconomic Model," The Quarterly Journal of Economics, MIT Press, vol. 100(2), pages 529-38, May.
  11. Oliver Jean Blanchard, 1987. "Aggregate and Individual Price Adjustment," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 18(1), pages 57-122.
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