Sticky Prices, Limited Participation, or Both?

Niki Papadopoulou

No 2008-4, Working Papers from Central Bank of Cyprus

Abstract: This paper investigates the micro mechanisms by which monetary policy affects and is transmitted through the US economy, by developing a unified, dynamic, stochastic, general equilibrium model that nests two classes of models. The first sticky prices and the second limited participation. Limited participation is incorporated by assuming that households are faced with quadratic portfolio adjustment costs. Monetary policy is characterized by a generalized Taylor rule with interest rate smoothing. The model is calibrated and investigates whether the unified model performs better in replicating empirical stylized facts, than the models that have only sticky price or limited participation. The unified model replicates the second moments of the data better than the other two types of models. It also improves on the ability of the sticky price model to deliver the hump-shaped response of output and inflation. Moreover, it also delivers on the ability of the limited participation model to replicate the fall in profits and wages, after a contractionary monetary policy.

Keywords: Monetary policy; sticky prices; Taylor rule; DSGE model (search for similar items in EconPapers)
JEL-codes: E31 E32 E44 E52 (search for similar items in EconPapers)
Pages: 32 pages
Date: 2008-06
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Working Paper: Sticky Prices, Limited Participation or Both? (2004)
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Persistent link: https://EconPapers.repec.org/RePEc:cyb:wpaper:2008-4

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