Sticky Price Models of the Business Cycle: Can the Contract Multiplier Solve the Persistence Problem?

33 Pages Posted: 1 Jul 2000 Last revised: 17 Nov 2022

See all articles by Varadarajan V. Chari

Varadarajan V. Chari

University of Minnesota - Twin Cities - Department of Economics; Federal Reserve Bank of Minneapolis; National Bureau of Economic Research (NBER)

Patrick J. Kehoe

Federal Reserve Bank of Minneapolis - Research Department; University of Minnesota - Twin Cities - Department of Economics; National Bureau of Economic Research (NBER)

Ellen R. McGrattan

Federal Reserve Bank of Minneapolis - Research Department; University of Minnesota - Twin Cities; National Bureau of Economic Research (NBER)

Date Written: October 1996

Abstract

The purpose of this paper is to construct a quantitative equilibrium model with price setting and use it to ask whether staggered price setting can generate persistent output fluctuations following monetary shocks. We construct a business cycle version of a standard sticky price model in which imperfectly competitive firms set nominal prices in a staggered fashion. We assume that prices are exogenously sticky for a short period of time. Persistent output fluctuations require endogenous price stickiness in the sense that firms choose not to change prices very much when they can do so. We find the amount of endogenous stickiness to be small. As a result, we find that such a model cannot generate persistent movements in output following monetary shocks.

Suggested Citation

Chari, Varadarajan V. and Kehoe, Patrick J. and McGrattan, Ellen R., Sticky Price Models of the Business Cycle: Can the Contract Multiplier Solve the Persistence Problem? (October 1996). NBER Working Paper No. w5809, Available at SSRN: https://ssrn.com/abstract=225597

Varadarajan V. Chari (Contact Author)

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Patrick J. Kehoe

Federal Reserve Bank of Minneapolis - Research Department ( email )

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University of Minnesota - Twin Cities - Department of Economics ( email )

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National Bureau of Economic Research (NBER) ( email )

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Ellen R. McGrattan

Federal Reserve Bank of Minneapolis - Research Department ( email )

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University of Minnesota - Twin Cities

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