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Endogenous Money or Sticky Wages: A Bayesian Approach

Guangling Liu ()

No 175, Working Papers from Economic Research Southern Africa

Abstract: This paper attempts to answer question similar to that asked by Ireland (2003): What explains the correlations between nominal and real variables in postwar US data? More precisely, this paper aims to investigate whether endogenous money, sticky wages, or some combination of the two, are necessary features in a dynamic New Keynesian model in explaining the correlations between nominal and real variables in postwar US data. To do so, we estimate a medium-scale dynamic stochastic general equilibrium model of endogenous money. The model is estimated using Bayesian maximum likelihood and compared with a restricted version of the structural model, in which wages are flexible. We conclude that both endogenous money and sticky wages are necessary features in a dynamic New Keynesian model in explaining the variation in key macroeconomic variables, both nominal and real.

Keywords: Endogenous money; Sticky wages; New Keynesian model; Bayesian analysis (search for similar items in EconPapers)
JEL-codes: E31 E32 E52 (search for similar items in EconPapers)
Pages: 25 pages
Date: 2010
New Economics Papers: this item is included in nep-cba, nep-dge and nep-mac
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