NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Sticky Price and Limited Participation Models of Money: A Comparison

Lawrence J. Christiano, Martin Eichenbaum, Charles L. Evans

NBER Working Paper No. 5804
Issued in October 1996
NBER Program(s):   EFG   ME

This paper provides new evidence that models of the monetary transmission mechanism should be consistent with at least the following facts. In response to a contractionary monetary policy shock, the aggregate price level responds very little, aggregate output falls, interest rates initially rise, real wages decline, though by a modest amount, and profits fall. The paper argues that neither sticky price nor limited participation models can convincingly account for these facts. The key failing of the sticky price model is that it implies profits rise after a contractionary monetary policy shock. This finding is robust to a variety of perturbations of the benchmark sticky price model that we consider. In contrast, the limited participation model can account for all of the facts mentioned above. But it can do so only if one is willing to assume a high labor supply elasticity (2) and a high average markup (40%). The shortcomings of both models reflect the absence of other frictions, such as wage contracts, which dampen movements in the marginal cost of production after a monetary policy shock.

download in pdf format
   (2656 K)

email paper

This paper is available as PDF (2656 K) or via email.

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w5804

Published: Christiano, Lawrence J., Martin Eichenbaum and Charles L. Evans. "Sticky Price And Limited Participation Models Of Money: A Comparison," European Economic Review, 1997, v41(6,Jun), 1201-1249.

Users who downloaded this paper also downloaded these:
Christiano, Eichenbaum, and Evans w6371 Modeling Money
Eichenbaum and Christiano w4129 Liquidity Effects, Monetary Policy, and the Business Cycle
Christiano and Eichenbaum w3974 Liquidity Effects and the Monetary Transmission Mechanism
Christiano, Eichenbaum, and Evans w6400 Monetary Policy Shocks: What Have We Learned and to What End?
Christiano, Eichenbaum, and Evans w8403 Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy
 
Publications
Activities
Meetings
Data
People
About

Support
National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us