On the Transmission of Monetary Policy Shocks

Kevin X.D. Huang (), Zheng Liu () and Louis Phaneuf ()

No 112, Cahiers de recherche CREFE / CREFE Working Papers from CREFE, Université du Québec à Montréal

Abstract: Empirical studies reveal that monetary policy shocks generate long-lasting effects on real GDP, countercyclical real wages before World War II and procyclical real wages afterwards. In this paper, we construct a dynamic general equilibrium model to explain the observed output persistence and the evolving nature of real wage cyclicality. The model features three important rigidities: staggered price-setting, staggered wage-setting, and an input-output structure. We show that, while no subset of the model with fewer ingredients can produce both the desired patterns of real wage dynamics and persistent movements in aggregate output, the model with all three features successfully accounts for these empirical regularities. In particular, it explains how the real wage can change from being countercyclical or acyclical to being procyclical as the input-output structure becomes more sophisticated, while at the same time delivering significant output persistence. The ascending sophistication of the input-output structure in the model mimics the rising complexity of the input-output connections from the prewar period to the postwar period in the actual economies, a trend that is documented in the literature.

Keywords: Staggered Contracts; Input-Output Structure; Real Wage Cyclicality; Output Persistence; Monetary Policy (search for similar items in EconPapers)
JEL-codes: E31 E32 E52 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge
Date: 2000-05
Note: Previously circulated under the title "Staggered Contracts, Intermediate Goods, and the Dynamic Effects of Monetary Shocks on Output, Inflation, and Real Wages"
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