Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy
48 Pages Posted: 29 Jul 2001 Last revised: 19 Jun 2021
Date Written: July 2001
We present a model embodying moderate amounts of nominal rigidities which accounts for the observed inertia in inflation and persistence in output. The key features of our model are those that prevent a sharp rise in marginal costs after an expansionary shock to monetary policy. Of these features, the most important are staggered wage contracts of average duration three quarters, and variable capital utilization.
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