Stochastic Nominal Wage Contracts in a Cash-in-Advance model

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

No 2000032, Discussion Papers (REL - Recherches Economiques de Louvain) from Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES)

Abstract: The aim of this article is to assess the ability of Calvo (1983) type nominal wage contract to generate a positive and long-lasting hump-shaped response of output to a monetary stimulus, as suggested in empirical studies. To this end, we develop a simple cash-in-advance model, in which stochastic nominal wage contracts are introduced. This reduces the negative efFect of the so-called inflation tax such that monetary shocks hzve a positive hump-shaped effect on output. The variance decomposition analysis suggests that monetary shocks explain up to 40% of the total variance of output in the first quarter and have a long lasting effect, in our calibrated economy (namely the German economy). Further, the model also mimics the correlation between output and inflation and real balances observed in Germany. We also propose an evaluation of the effects of variations in the mean duration of contracts on these indicators.

Keywords: Business Cycle; Money; Persistence; Calyo Type Nominal Wage Contracts (search for similar items in EconPapers)
JEL-codes: E31 E32 (search for similar items in EconPapers)
Pages: 22
Date: 2000-09-01
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Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:ctl:louvre:2000032

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