TY - JOUR AU - Christiano,Lawrence J. AU - Eichenbaum,Martin AU - Evans,Charles L. TI - Sticky Price and Limited Participation Models of Money: A Comparison JF - National Bureau of Economic Research Working Paper Series VL - No. 5804 PY - 1996 Y2 - October 1996 UR - http://www.nber.org/papers/w5804 L1 - http://www.nber.org/papers/w5804.pdf N1 - Author contact info: Lawrence Christiano Department of Economics Northwestern University 2001 Sheridan Road Evanston, IL 60208 Tel: 847/491-8231 Fax: 847/491-7001 E-Mail: l-christiano@northwestern.edu Martin S. Eichenbaum Department of Economics Northwestern University 2003 Sheridan Road Evanston, IL 60208 Tel: 847/491-8232 Fax: 847/491-7001 E-Mail: eich@northwestern.edu Charles Evans Federal Reserve Bank of Chicago 2nd floor 230 S. LaSalle Street Chicago, IL 60604 Tel: 312-322-5001 E-Mail: charles.l.evans@chi.frb.org AB - 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. ER -