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The Role of Money Demand in a Business Cycle Model with Staggered Wage Contracts

Gerke, Rafael ; Rubart, Jens (2009)
The Role of Money Demand in a Business Cycle Model with Staggered Wage Contracts.
Report, Primary publication

Abstract

The question of the main determinants of persistent responses due to nominal shocks captures, at least since Chari et al. (2000), a major part of the recent macroeconomic debate. However, the question whether sticky wages and/or sticky prices are sufficient for persistent reactions of key economic variables remains open. In the present model we allow for nominal rigidities due to Taylor- like wage setting as well as price adjustment costs. However, as our analysis illustrates, smoothing marginal costs seems crucial to derive a contract multiplier, wage staggering alone is not sufficient. Without considering a more specific analysis of factor market frictions, we enforce a point made by Erceg (1997) by analyzing the structure of money demand. In particular, we analyze a `standard' consumption based money demand function by varying the interest rate elasticity of money demand as well as the steady state rate of money holdings. Our results show that the persistency of the output/price dynamics can be affected crucially by the form of the implicit money demand function. In particular, it is shown that staggered wage contracts have to be accompanied by a sufficiently low interest rate elasticity, otherwise the model fails to reproduce reasonable responses of real variables.

Item Type: Report
Erschienen: 2009
Creators: Gerke, Rafael ; Rubart, Jens
Type of entry: Primary publication
Title: The Role of Money Demand in a Business Cycle Model with Staggered Wage Contracts
Language: English
Date: 2009
Place of Publication: Darmstadt
Series: Darmstadt Discussion Papers in Economics
Series Volume: 142
URL / URN: http://tuprints.ulb.tu-darmstadt.de/4783
Abstract:

The question of the main determinants of persistent responses due to nominal shocks captures, at least since Chari et al. (2000), a major part of the recent macroeconomic debate. However, the question whether sticky wages and/or sticky prices are sufficient for persistent reactions of key economic variables remains open. In the present model we allow for nominal rigidities due to Taylor- like wage setting as well as price adjustment costs. However, as our analysis illustrates, smoothing marginal costs seems crucial to derive a contract multiplier, wage staggering alone is not sufficient. Without considering a more specific analysis of factor market frictions, we enforce a point made by Erceg (1997) by analyzing the structure of money demand. In particular, we analyze a `standard' consumption based money demand function by varying the interest rate elasticity of money demand as well as the steady state rate of money holdings. Our results show that the persistency of the output/price dynamics can be affected crucially by the form of the implicit money demand function. In particular, it is shown that staggered wage contracts have to be accompanied by a sufficiently low interest rate elasticity, otherwise the model fails to reproduce reasonable responses of real variables.

Uncontrolled Keywords: Monetary Policy Shocks, Sticky Prices, Staggered Wages, Money Demand
URN: urn:nbn:de:tuda-tuprints-47838
Additional Information:

JEL classification: E32, E41; Erstellt Februar 2005

Classification DDC: 300 Social sciences > 330 Economics
Divisions: 01 Department of Law and Economics
01 Department of Law and Economics > Volkswirtschaftliche Fachgebiete
Date Deposited: 31 Jan 2016 20:57
Last Modified: 25 Oct 2023 08:49
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