Sticky price and limited participation models of money: a comparison

Lawrence Christiano, Martin Eichenbaum and Charles Evans

No 227, Staff Report from Federal Reserve Bank of Minneapolis

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 counterfactual 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 or factor hoarding, which dampen movements in the marginal cost of production after a monetary policy shock.

Keywords: Money; theory (search for similar items in EconPapers)
Date: 1996
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Citations: View citations in EconPapers (64)

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Related works:
Journal Article: Sticky price and limited participation models of money: A comparison (1997)
Working Paper: Sticky price and limited participation models of money: a comparison (1996)
Working Paper: Sticky Price and Limited Participation Models of Money: A Comparison (1996)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedmsr:227

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