 Sticky price and limited participation models of money: a comparisonLawrence Christiano, Martin Eichenbaum and Charles Evans No WP-96-28, Working Paper Series, Macroeconomic Issues from Federal Reserve Bank of Chicago Abstract: We provide new evidence that models of the monetary transmission mechanism should be consistent with at least the following facts. After a contractionary monetary policy shock, the aggregate price level responds very little, aggregate output falls, interest rates initially rise, real wages decline by a modest amount, and profits fall. We compare the ability of sticky price and limited participation models with frictionless labor markets to account for these facts. The key failing of the sticky price model lies in its conterfactual implications for profits. The limited participation model can account for all the above facts, but only if one is willing to assume a high labor supply elasticity (2 percent) and a high markup (40 percent). The shortcomings of both models reflect the absence of labor market frictions, such as wage contracts of factor hoarding, which dampen movements in the marginal cost of production after a monetary policy shock. nerships or affiliated with banking organizations are less likely to provide debt financing than other SBICs. Keywords: Money theory; Prices (search for similar items in EconPapers) There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it. Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:fip:fedhma:wp-96-28 Ordering information: This working paper can be ordered from Access Statistics for this paper More papers in Working Paper Series, Macroeconomic Issues from Federal Reserve Bank of Chicago Contact information at EDIRC. |
Is your work missing from RePEc? Here is how to contribute.
Questions or problems? Check the EconPapers FAQ or send mail to econpapers@oru.se.
EconPapers is hosted by the
School of Business at Örebro University.