The Role of Contracting Schemes for the Welfare Costs of Nominal Rigidities Over the Business Cycle

Paustian, Matthias O.

doi:10.2139/ssrn.761704

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The Role of Contracting Schemes for the Welfare Costs of Nominal Rigidities Over the Business Cycle

Bundesbank Discussion Paper Series No. 22/2005

48 Pages Posted: 28 Jul 2005

See all articles by Matthias O. Paustian

Matthias O. Paustian

Board of Governors of the Federal Reserve System

Date Written: July 13, 2005

Abstract

What is the role of contracting schemes for the welfare costs of nominal rigidities over the business cycle? We examine 4 different modeling schemes of nominal rigidities that all have the same average duration of contracts. We find that Calvo (1983) wage and price contracts may deliver welfare costs that are 3-4 times higher than Taylor (1980) contracts. However, that result is sensitive to the monetary policy rule. We discuss the implications of modeling capital mobility and of adopting the Mankiw and Reis (2002) sticky information scheme for the welfare costs of nominal rigidities.

Keywords: welfare, Calvo, Taylor, Wolman, sticky information, costs of nominal rigidities

JEL Classification: E52, E32

Suggested Citation: Suggested Citation

Paustian, Matthias O., The Role of Contracting Schemes for the Welfare Costs of Nominal Rigidities Over the Business Cycle (July 13, 2005). Bundesbank Discussion Paper Series No. 22/2005, Available at SSRN: https://ssrn.com/abstract=761704 or http://dx.doi.org/10.2139/ssrn.761704