Sticky price models of the business cycle: can the contract multiplier solve the persistence problem?

Varadarajan Chari, Patrick Kehoe and Ellen McGrattan

No 217, Staff Report from Federal Reserve Bank of Minneapolis

Abstract: We construct a quantitative equilibrium model with price setting and use it to ask whether with staggered price setting monetary shocks can generate business cycle fluctuations. These fluctuations include persistent output fluctuations along with the other defining features of business cycles, like volatile investment and smooth consumption. We assume that prices are exogenously sticky for a short period of time. Persistent output fluctuations require endogenous price stickiness in the sense that firms choose not to change prices very much when they can do so. We find that for a wide range of parameter values the amount of endogenous stickiness is small. As a result, we find that in a standard quantitative business cycle model staggered price setting, by itself, does not generate business cycle fluctuations.

Keywords: Price regulation; Business cycles; Multiplier (Economics) (search for similar items in EconPapers)
Date: 1998
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Citations: View citations in EconPapers (58)

Published in Econometrica (Vol. 68, No. 5, September 2000, pp. 1151-79)

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Related works:
Journal Article: Sticky Price Models of the Business Cycle: Can the Contract Multiplier Solve the Persistence Problem? (2000)
Working Paper: Sticky Price Models of the Business Cycle: Can the Contract Multiplier Solve the Persistence Problem? (1996)
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