Another Look at Sticky Prices and Output Persistence
Pengfei Wang () and
Yi Wen ()
Working Papers from Cornell University, Center for Analytic Economics
Price rigidity is the key mechanism for propagating business cycles in traditional Keynesian theory. Yet the New Keynesian literature has failed to show that sticky prices by itself can effectively propagate business cycles in general equilibrium. This situation may be a direct consequence of the notion that money-in-utility (MIU) and cash-in-advance (CIA) are equivalent mechanisms for generating money demand. They are not. We show that price rigidity in fact can (by itself) give rise to a powerful propagation mechanism of the business cycle under CIA constraint in standard New Keynesian general equilibrium models. In particular, we show that reasonable price stickiness can generate highly persistent, hump-shaped movements in output, investment and employment in response to either monetary or non-monetary shocks. Hence, whether or not price rigidity is responsible for output persistence (and the business cycle in general) is not a theoretical question, but an empirical one.
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1) Track citations by RSS feed
Downloads: (external link)
Journal Article: Another look at sticky prices and output persistence (2006)
Working Paper: Another look at sticky prices and output persistence (2005)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:ecl:corcae:04-19
Access Statistics for this paper
More papers in Working Papers from Cornell University, Center for Analytic Economics Contact information at EDIRC.
Bibliographic data for series maintained by ().