IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this paper or follow this series

Do Flexible Durable Goods Prices Undermine Sticky Price Models?

  • Robert Barsky

    (The University of Michigan)

  • Christopher House

    (The University of Michigan)

  • Miles Kimball

    (The University of Michigan)

The “neoclassical synthesis” sticky price model exhibits strange behavior when augmented with markets for durable goods with flexible prices. While in the data the output of durable goods responds strongly and positively to a loosening of monetary policy, in dynamic general equilibrium models a monetary expansion causes the output of flexibly priced durables to contract. In an instructive special case in which the only sticky prices are those of nondurables, the negative co-movement of durable and nondurable output exactly offsets and the behavior of aggregate output in the model is very similar to that of a model with fully flexible prices. This neutrality result is special, but the perverse response of durables to monetary policy is highly robust. The reason for the co-movement problem is the combination of a naturally high intertemporal elasticity of substitution for the purchases of durables and temporarily high factor prices associated with an economic expansion.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://econwpa.repec.org/eps/mac/papers/0302/0302003.pdf
Download Restriction: no

Paper provided by EconWPA in its series Macroeconomics with number 0302003.

as
in new window

Length: 42 pages
Date of creation: 05 Feb 2003
Date of revision:
Handle: RePEc:wpa:wuwpma:0302003
Note: Type of Document - Acrobat PDF; prepared on IBM PC ; to print on HP; pages: 42 ; figures: included
Contact details of provider: Web page: http://econwpa.repec.org

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Christopher J. Erceg & Andrew T. Levin, 2002. "Optimal monetary policy with durable and non-durable goods," International Finance Discussion Papers 748, Board of Governors of the Federal Reserve System (U.S.).
  2. Christopher J. Erceg & Dale W. Henderson & Andrew T. Levin, 1999. "Optimal monetary policy with staggered wage and price contracts," International Finance Discussion Papers 640, Board of Governors of the Federal Reserve System (U.S.).
  3. James Tobin, 1955. "A Dynamic Aggregative Model," Journal of Political Economy, University of Chicago Press, vol. 63, pages 103.
  4. Laurence Ball & David Romer, 1987. "Real Rigidities and the Non-Neutrality of Money," NBER Working Papers 2476, National Bureau of Economic Research, Inc.
  5. Christina D. Romer & David H. Romer, 1989. "Does Monetary Policy Matter? A New Test in the Spirit of Friedman and Schwartz," NBER Working Papers 2966, National Bureau of Economic Research, Inc.
  6. Leahy, John V, 1995. "The Effects of Real and Monetary Shocks in a Business Cycle Model with Some Sticky Prices: Comment," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(4), pages 1237-40, November.
  7. Lee E. Ohanian & Alan C. Stockman & Lutz Killian, 1994. "The effects of real and monetary shocks in a business cycle model with some sticky prices," Proceedings, Federal Reserve Bank of Cleveland, pages 1209-1240.
  8. Mark Bils & Peter J. Klenow, 2002. "Some Evidence on the Importance of Sticky Prices," NBER Working Papers 9069, National Bureau of Economic Research, Inc.
  9. Bils, Mark, 1989. "Pricing in a Customer Market," The Quarterly Journal of Economics, MIT Press, vol. 104(4), pages 699-718, November.
  10. Kimball, Miles S, 1995. "The Quantitative Analytics of the Basic Neomonetarist Model," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(4), pages 1241-77, November.
  11. Matthew D. Shapiro, 1993. "Federal Reserve Policy: Cause and Effect," NBER Working Papers 4342, National Bureau of Economic Research, Inc.
  12. Mark Bils & Peter J. Klenow & Oleksiy Kryvtsov, 2003. "Sticky prices and monetary policy shocks," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 2-9.
  13. Mankiw, N. Gregory, 1982. "Hall's consumption hypothesis and durable goods," Journal of Monetary Economics, Elsevier, vol. 10(3), pages 417-425.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:wpa:wuwpma:0302003. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (EconWPA)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.