Sticky Price Models of the Business Cycle: Can the Contract Multiplier Solve the Persistence Problem?

By V. V. Chari, Patrick J. Kehoe, Ellen R Mcgrattan. 2000

862 citations recorded by the source corpus.

The purpose of this paper is to construct a quantitative equilibrium model with price setting and use it to ask whether staggered price setting can generate persistent output fluctuations following monetary shocks. We construct a business cycle version of a standard sticky price model in which imperfectly competitive firms set nominal prices in a staggered fashion. We assume that prices are exogenously sticky for a short period of time. Persistent output fluctuations require endogenous price stickiness in the sense that firms choose not to change prices very much when they can do so. We find the amount of endogenous stickiness to be small. As a result, we find that such a model cannot generate persistent movements in output following monetary shocks.

Subfields: Economics and Econometrics

View Paper: https://www.semanticscholar.org/paper/149b3daff76e17892b37a8d6fbf81a68818776f4

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Citations in the corpus

Staggered Price-Setting, Staggered Wage-Setting, and Business Cycle Persistence (2002, background): “More recently, Chari et al. (2000) (CKM) carry this intuition to a general equilibrium environment.”
Individual Expectations and Aggregate Macro Behavior (2011, background): “Woodford (2003) and Gali (2008)). The standard NK model with a rational representative agent however has lost most of its appeal in the light of overwhelming empirical evidence: it is clear from the data that this approach is not the most suitable to reproduce stylized facts such as the persistence ”
The Need for International Policy Coordination: What's Old, What's New, What's Yet to Come? (2005, positive): “The treatment of monopolistic competition in these models is now standard.12 Following Chari et al. (2000), we assume the artifice of a bundler who assembles the output of households into the sectoral goods that make up the composite consumption goods: Yj ¼ Z 1 0 Yj hð Þ h 1ð Þ=hdh h= h 1ð Þ j ¼…”
On the Transmission of Monetary Policy Shocks (2001, neutral): “The simple model with staggered price contracts generates no endogenous persistence in output movements and too strongly procyclical movements of the real wage (e.g., Chari, Kehoe, and McGrattan (2000)).”
Fair Wages in a New Keynesian Model of the Business Cycle (2002, background): “Our alistic Chari et al. (2000) recently stressed that insensitive real marginal cost dynamics indispensable for models with nominal price rigidities and intertemporal links (suc investment) to generate a plausibly persistent response of output to monetary s The reported IRFs underline this…”
"Unfunded Liabilities" and Uncertain Fiscal Financing (2010, positive): “The parameter governing the interest elasticity of real money balances, k, is set to 2.6 (Chari et al., 2000).”
Testing for a Forward-Looking Phillips Curve: Additional Evidence from European and US Data (2001, methodology): “Table 2 uses the hybrid version which includes threequarter average of lag and lead of inflation, as in equations (10) and (11).”
Identifying the Influences of Nominal and Real Rigidities in Aggregate Price-Setting Behavior (2007, neutral): “See Rotemberg (1996), Yun (1996), Goodfriend and King (1997), Rotemberg and Woodford (1997), Clarida et al. (1999), and Woodford (2003). (2)The importance of combining nominal and real rigidities has been emphasized by Ball and Romer (1990), Chari et al.”
THE TRANSMISSION OF MONETARY POLICY IN A MULTISECTOR ECONOMY (2009, neutral): “Under the assumption that the aggregators (10) and (14) are Cobb-Douglas, the input weights ij and ij are respectively equal to the share of sector i in the material and investment input expenditures by sector j.”