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On Stickiness, Cash in Advance, and Persistence

  • Stéphane Auray

    ()

    (Université Lille 3 (GREMARS), Université de Sherbrooke (GREDI) and CIRPÉE)

  • Beatriz de Blas

    ()

    (Universidad Autonoma de Madrid, Departamento de Analisis Economico)

This paper shows that a model which combines sticky prices and sticky wages with investment in the cash-in-advance constraint generates business cycle dynamics consistent with empirical evidence. The model reproduces the responses of the key macroeconomic variables to technology and money supply shocks; in particular, it generates enough output and in°ation persistence with standard stickiness parameters. This setup is also able to generate the liquidity effect after a money injection, overcoming a weakness in standard new Keynesian models. When taken to the data, the model explains qualitatively well the US postwar period, and does quantitatively better for the great in°ation of the 70s.

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File URL: http://gredi.recherche.usherbrooke.ca/wpapers/GREDI-0919.pdf
File Function: First version, 2009
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Paper provided by Departement d'Economique de la Faculte d'administration à l'Universite de Sherbrooke in its series Cahiers de recherche with number 09-19.

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Length: 40 pages
Date of creation: 01 Sep 2009
Date of revision:
Handle: RePEc:shr:wpaper:09-19
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  8. Galí, Jordi & Rabanal, Pau, 2004. "Technology Shocks and Aggregate Fluctuations: How Well Does the RBC Model Fit Post-War US Data?," CEPR Discussion Papers 4522, C.E.P.R. Discussion Papers.
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  16. Andrew Levin & Christopher J. Erceg & Dale W. Henderson, 1999. "Optimal Monetary Policy with Staggered Wage and Price Contracts," Computing in Economics and Finance 1999 1151, Society for Computational Economics.
  17. K. Huang & Z. Liu, . "Staggered price-setting, staggered wage-setting, and business cycle persistence," Working Papers 2000-28, Utah State University, Department of Economics.
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  22. Stockman, Alan C., 1981. "Anticipated inflation and the capital stock in a cash in-advance economy," Journal of Monetary Economics, Elsevier, vol. 8(3), pages 387-393.
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