Sticky Price and Limited Participation Models of Money: A Comparison / Lawrence J. Christiano, Martin Eichenbaum, Charles L. Evans.

Format:

Book

Author/Creator:

Christiano, Lawrence J.

Contributor:

National Bureau of Economic Research.

Eichenbaum, Martin.

Evans, Charles L.

Series:

Working Paper Series (National Bureau of Economic Research) no. w5804.

NBER working paper series no. w5804

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Other Title:

Sticky Price and Limited Participation Models of Money

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 1996.

Summary:

This paper provides new evidence that models of the monetary transmission mechanism should be consistent with at least the following facts. In response to a contractionary monetary policy shock, the aggregate price level responds very little, aggregate output falls, interest rates initially rise, real wages decline, though by a modest amount, and profits fall. The paper argues that neither sticky price nor limited participation models can convincingly account for these facts. The key failing of the sticky price model is that it implies profits rise after a contractionary monetary policy shock. This finding is robust to a variety of perturbations of the benchmark sticky price model that we consider. In contrast, the limited participation model can account for all of the facts mentioned above. But it can do so only if one is willing to assume a high labor supply elasticity (2) and a high average markup (40%). The shortcomings of both models reflect the absence of other frictions, such as wage contracts, which dampen movements in the marginal cost of production after a monetary policy shock.

Notes:

Print version record

October 1996.