A Monetary Model of Factor Utilisation
Katharine S. Neiss
Bank of England - Monetary Analysis
London School of Economics & Political Science (LSE); Autonomous University of Barcelona - Department of Economics and Economic History
Bank of England Working Paper No. 154
The propagation mechanism of monetary shocks in an otherwise standard sticky-price model is examined, modified to incorporate factor hoarding in the form of variable capital utilisation rates and labour effort. In contrast to previous studies, it is found that real effects of monetary shocks can be generated at relatively low degrees of nominal rigidity. Factor hoarding enriches the propagation mechanism by flattening the marginal cost responses to monetary shocks. The assumption of labour hoarding is crucial for generating persistence, while the assumption of variable capital utilisation allows the generation of realistic investment volatility, without having to introduce capital adjustment costs.
Number of Pages in PDF File: 41
JEL Classification: E51, E22working papers series
Date posted: June 25, 2002
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