Sticky Prices versus Monetary Frictions: An Estimation of Policy Trade-Offs

85 Pages Posted: 14 May 2009

See all articles by S. Borağan Aruoba

S. Borağan Aruoba

University of Maryland - Department of Economics

Frank Schorfheide

University of Pennsylvania - Department of Economics; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER); University of Pennsylvania - The Penn Institute for Economic Research (PIER)

Multiple version iconThere are 2 versions of this paper

Date Written: April 3, 2009

Abstract

The authors develop a two-sector monetary model with a centralized and decentralized market. Activities in the centralized market resemble those in a standard New Keynesian economy with price rigidities. In the decentralized market agents engage in bilateral exchanges for which money is essential. The model is estimated and evaluated based on postwar U.S. data. They document its money demand properties and determine the optimal long-run inflation rate that trades off the New Keynesian distortion against the distortion caused by taxing money and hence transactions in the decentralized market. The authors find that target rates of -1% or less are desirable, which contrasts with policy recommendations derived from a cashless New Keynesian model.

Keywords: Long-run inflation target, monetary models, welfare costs of inflation, bayesian estimation

JEL Classification: C5, E4, E5

Suggested Citation

Aruoba, S. Boragan and Schorfheide, Frank, Sticky Prices versus Monetary Frictions: An Estimation of Policy Trade-Offs (April 3, 2009). FRB of Philadelphia Working Paper No. 09-8, Available at SSRN: https://ssrn.com/abstract=1404642 or http://dx.doi.org/10.2139/ssrn.1404642

S. Boragan Aruoba

University of Maryland - Department of Economics ( email )

College Park, MD 20742
United States
301-405-3508 (Phone)
301-405-3542 (Fax)

Frank Schorfheide (Contact Author)

University of Pennsylvania - Department of Economics ( email )

Ronald O. Perelman Center for Political Science
133 South 36th Street
Philadelphia, PA 19104-6297
United States

HOME PAGE: http://www.econ.upenn.edu/~schorf

Centre for Economic Policy Research (CEPR)

London
United Kingdom

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

University of Pennsylvania - The Penn Institute for Economic Research (PIER) ( email )

Philadelphia, PA
United States

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
34
Abstract Views
572
PlumX Metrics