A NOTE ON INCREASING HAZARD FUNCTIONS AND THE MONETARY TRANSMISSION MECHANISM

This note studies the implications of the price reset hazard function for the monetary transmission mechanism of sticky price models. I first document some general analytical results that highlight the central role of the price (accumulative) distribution in linking the hazard function and the impulse response function. I find that nominal rigidity underlying increasing hazard functions is more successful than real rigidity in replicating realistic macro persistence. In addition, numerical simulations show that the interaction between the increasing hazard function and the real rigidity provides a powerful propagation mechanism for monetary shocks.

Managing Currency Pegs

The combination of a fixed exchange rate and downward nominal wage rigidity creates a real rigidity. In turn, this real rigidity makes the economy prone to involuntary unemployment during external crises. This paper presents a graphical analysis of alternative policy strategies aimed at mitigating this source of inefficiency. First- and second-best monetary and fiscal solutions are analyzed. Second-best solutions are prudential, whereas first-best solutions are not.