Real Effects of Nominal shocks: a 2-sector Dynamic Model with Slow Capital Adjustment and Money-in-the-utility

Peter Benczur

No 2003/9, MNB Working Papers from Magyar Nemzeti Bank (Central Bank of Hungary)

Abstract: This paper develops a two-sector model to study the e.ect and incidence of nominal shocks (fiscal or exchange rate policies) on sectors and factors of production. I adopt a classical twosector model of a small open economy and enrich its structure with gradual investment and a preference for real money holdings. An expansive nominal shock (fiscal expansion or a nominal appreciation) leads to increased spending (due to the role of money), which pushes nontraded prices up (with gradual capital adjustment, the short-term transformation curve is nonlinear). This translates into changes in factor rewards, capital labor ratios and sector-level employment of capital and labor. Higher nontraded prices lead to extra domestic income, validating some of the initial excess spending. This propagation mechanism leads to a persistent real e.ect (on relative prices, factor rewards, capital accumulation) of nominal shocks, which disappears gradually through money outflow (trade deficit). I also draw parallels with the NATREX approach of equilibrium real exchange rates and the literature on exchange rate based stabilizations.

Keywords: two-sector growth model; money-in-the-utility; q-theory; real effects of nominal shocks; endogenous pass-through. (search for similar items in EconPapers)
JEL-codes: F32 F41 F43 (search for similar items in EconPapers)
Pages: 46 pages
Date: 2003
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Citations: View citations in EconPapers (2)

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Related works:
Working Paper: Real Effects of Nominal Shocks: a 2-Sector Dynamic Model with Slow Capital Adjustment and Money-in-the-Utility (2010)
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