A Two-Good Model with Capital Accumulation and a Real Balance Effect

Giles Keating

Oxford Economic Papers, 1987, vol. 39, issue 3, 481-99

Abstract: The two-good model (consumer and capital goods) suggested by J. Tobin and W. C. Brainard (1969) and formalized in a static model by D. W. Henderson and T. Sargent (1973, 1979) is generalized to a dy namic model with rational expectations. Financial markets determine r elative goods prices. With no nominal stickiness, the market-clearing real wage and level of employment fall instantly and persistently in response to an unexpected monetary contraction. This gives instant, persistent involuntary unemployment when real (not nominal) wages are sticky. Copyright 1987 by Royal Economic Society.

Date: 1987
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