Time-to-build approach in a sticky price, sticky wage optimizing monetary model

Miguel Casares

No 147, Working Paper Series from European Central Bank

Abstract: One of the most significant characteristics of optimizing models is that the behavioral equations involved are typically forward looking, i.e. agents are concerned about the futures rather than the past. This creates difficulties when modelling some of the business-cycle patterns widely observed in modern economies. For example, it is not easy to obtain the delay in the response of the rate of inflation to a monetary shock. This paper shows that an optimizing monetary model with endogenous capital, sticky prices, sticky wages, and adjustment costs of investment, can replicate a lag in the maximum response of both output and inflation to an interest rate shock when taking into account a time-to-build requirement for investment projects. JEL Classification: E12, E22, E47

Keywords: nominal rigidities; response lag; time-to-build (search for similar items in EconPapers)
Date: 2002-05
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