Investment, Matching and Persistence in a modified Cash-in-Advance Economy

Stéphane Auray and Beatriz de Blas ()

No 2011/10, Working Papers in Economic Theory from Universidad Autónoma de Madrid (Spain), Department of Economic Analysis (Economic Theory and Economic History)

Abstract: We simulate and estimate a new Keynesian search and matching model with sticky wages in which capital has to be financed with cash, at least partially. Our objective is to assess the ability of this framework to account for the persistence of output and inflation observed in the data. We find that our setup generates enough output and inflation persistence with standard stickiness parameters. The key factor driving these results is the inclusion of investment in the CIA constraint, rather than any other nominal or real rigidity. The model reproduces labor market dynamics after a positive increase in productivity: hours fall, nominal wages hardly react, and real wages go up. Regarding money supply shocks, we investigate the conditions under which our model specification generates the liquidity effect, a fact which is absent in most sticky price models.

Keywords: persistence; sticky prices; staggered bargaining wages; monetary facts; labor market facts; cash-in-advance. (search for similar items in EconPapers)
JEL-codes: E32 E41 E52 (search for similar items in EconPapers)
Pages: 44 pages
Date: 2011-12
New Economics Papers: this item is included in nep-cba, nep-dge and nep-mac
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Related works:
Journal Article: Investment, matching and persistence in a modified cash-in-advance economy (2013)
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