Sticky Price Models of the Business Cycle: Can the Contract Multiplier Solve the Persistence Problem?

Varadarajan Chari (), Patrick J. Kehoe () and Ellen R. McGrattan

No 5809, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: The purpose of this paper is to construct a quantitative equilibrium model with price setting and use it to ask whether staggered price setting can generate persistent output fluctuations following monetary shocks. We construct a business cycle version of a standard sticky price model in which imperfectly competitive firms set nominal prices in a staggered fashion. We assume that prices are exogenously sticky for a short period of time. Persistent output fluctuations require endogenous price stickiness in the sense that firms choose not to change prices very much when they can do so. We find the amount of endogenous stickiness to be small. As a result, we find that such a model cannot generate persistent movements in output following monetary shocks.

JEL-codes: E32 E52 (search for similar items in EconPapers)
Date: 1996-10
Note: EFG ME
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Related works:
Working Paper: Sticky price models of the business cycle: can the contract multiplier solve the persistence problem? (1998)
Journal Article: Sticky Price Models of the Business Cycle: Can the Contract Multiplier Solve the Persistence Problem? (2000)
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