Stochastic Nominal Wage Contacts in a Cash-in-Advance Model

Fabrice Collard and Guy Ertz
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Fabrice Collard: UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES); Université de Paris I, MAD
Guy Ertz: UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES)

No 1997017, LIDAM Discussion Papers IRES from Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES)

Abstract: We build a simple cash-in-advance model for the German economy, in which we introduce stochastic nominal wage contracts. This allows to weaken the negative effect of the inflation tax such that monetary shocks exert a positive effect on output dynamics. The nominal wage contract model is able to mimic the correlation of inflation and real balances with output. It also lowers the standard deviation of inflation relative to that of output. Further, the variance decomposition analysis indicates that in this setting, monetary shocks explain between 30% and 45% of output volatility in the first quarter. Moreover, it indicates that this model generates a long lasting effect of monetary shocks on output dynamics.

Keywords: Business Cycle; Money; Persistence; Nominal Wage Contracts (search for similar items in EconPapers)
JEL-codes: E31 E32 (search for similar items in EconPapers)
Pages: 18
Date: 1996-10-01, Revised 1997-07
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Persistent link: https://EconPapers.repec.org/RePEc:ctl:louvir:1997017

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