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Endogenous Money or Sticky Wages: A Bayesian Approach

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  • Guangling 'Dave' Liu

Abstract

This paper attempts to answer question similar to that asked by Ireland (2003): What explains the correlations between nominal and real variables in postwar US data? More precisely, this paper aims to investigate whether endogenous money, sticky wages, or some combination of the two, are necessary features in a dynamic New Keynesian model in explaining the correlations between nominal and real variables in postwar US data. To do so, we estimate a medium-scale dynamic stochastic general equilibrium model of endogenous money. The model is estimated using Bayesian maximum likelihood and compared with a restricted version of the structural model, in which wages are flexible. We conclude that both endogenous money and sticky wages are necessary features in a dynamic New Keynesian model in explaining the variation in key macroeconomic variables, both nominal and real.

Suggested Citation

  • Guangling 'Dave' Liu, 2010. "Endogenous Money or Sticky Wages: A Bayesian Approach," Working Papers 175, Economic Research Southern Africa.
  • Handle: RePEc:rza:wpaper:175
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    File URL: http://www.econrsa.org/node/198
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    Keywords

    Endogenous money; Sticky wages; New Keynesian model; Bayesian analysis;

    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
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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