Flattening of the Phillips Curve with State-Dependent Prices and Wages

We study monetary transmission in a model of state-dependent prices and wages based on ‘control costs’. Stickiness arises because precise choice is costly: decision-makers tolerate errors both in the timing of adjustments, and in the new level at which the price or wage is set. The model is calibrated to microdata on the size and frequency of price and wage changes. In our simulations, money shocks have less persistent real effects than in the Calvo framework; nonetheless, the model exhibits a substantial degree of non-neutrality, driven mainly by wage rigidity. State-dependent nominal stickiness implies a flatter Phillips curve as trend inflation declines, because price and wage adjustments become less frequent, making short-run inflation less reactive to shocks. Our model can explain almost half of the observed decline in the slope of the Phillips curve since 2000.

INSIDE MONEY IN GENERAL EQUILIBRIUM: DOES IT MATTER FOR MONETARY POLICY?

This paper analyzes the role and importance of “inside” money, made out of commercial banks' liabilities, for a New Keynesian model of the type commonly used for monetary policy analysis. The active role of inside money stems from its unique role in allowing payment for at least some consumption goods; shocks to the production of inside money may therefore have real effects. A calibrated version of the model is shown to generate small, but nonnegligible effects of inside money shocks on output and inflation. Moreover, the presence of inside money in the model leads to a slight attenuation of the effect of technology and monetary policy shocks. Finally, it is found that it is optimal for monetary policy to react to inside money shocks, but reacting to inflation alone does not result in a significant loss of household welfare.

The Puzzling Effect Of Money Shocks On Interest Rates

This study reexamines the controversial impact of changes in the growth rate of money supply on short-term nominal interest rates. Most of the early studies consistently find evidence that support a negative relationship between money shocks and interest rates. This relationship reflects the hypothesized liquidity effect. When the Fed accelerates the growth rate in money supply at given prices, output and inflation, the LM curve shifts, and real balances increase. Consequently, nominal an real interest rates are reduced. The results of the finite lag methods vary from one technique to another. However, the general trend points toward the vanishing liquidity effect. An infinite lag method which assumes a quadratic polynomial lag structure is also applied to data from 1972 through 1989. The results show a slight presence of the liquidity effect. The overall results also indicate that inflation rate as well as the variance of inflation rate slightly influence the relationship described above.