TY  - JOUR
AU  - Canzoneri,Matthew B.
AU  - Cumby,Robert E.
AU  - Diba,Behzad T.
TI  - The Cost of Nominal Inertia in NNS Models
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 10889
PY  - 2004
Y2  - November 2004
UR  - http://www.nber.org/papers/w10889
L1  - http://www.nber.org/papers/w10889.pdf
N1  - Author contact info:
Matthew Canzoneri
Department of Economics
Georgetown University
Washington, DC   20057
Tel: 202-687-5911
E-Mail: canzonem@georgetown.edu

Robert E. Cumby
Georgetown University
School of Foreign Service
Washington, DC 20057-1045
Tel: 202/687-2990
Fax: 202/687-6102
E-Mail: cumbyr@georgetown.edu

Behzad Diba
Department of Economics
Georgetown University
Washington, DC  20057
Tel: 202-687-5682
Fax: 202-687-6102
E-Mail: dibab@georgetown.edu
AB  - We calculate the welfare cost of nominal inertia in a New Neoclassical Synthesis model with wage and price stickiness, capital formation, and empirically estimated rules for government spending and the cental bank's interest rate policy. We calibrate our model to U.S. data, and we show that it captures many aspects of the U.S. business cycle. Moreover, our model is capable of generating the kind of volatility that has been observed in the efficiency gaps emphasized by Erceg, Henderson and Levin (2000) and Gali, Gertler and Lopez-Salido (2002). We also highlight some of the empirical shortcomings of the model; in particular, demand side shocks appear to be either missing or improperly modeled. We calculate the cost of nominal inertia under two specifications of monetary policy. The bottom line is that, under our preferred specification of monetary policy, the model implies a conservative estimate of the cost that is twenty to sixty times larger than Lucas's (2003) estimate: the "average" household in our model would be willing to give up one to three percent of consumption each period to be free of the effects of wage and price stickiness. Wage inertia appears to be the major source of these welfare costs.
ER  -