Abstract
We construct a quantitative equilibrium model with firms setting prices in a staggered fashion and use it to ask whether monetary shocks can generate business cycle fluctuations. These fluctuations include persistent movements in output along with the other defining features of business cycles, like volatile investment and smooth consumption. We assume that prices are exogenously sticky for a short time. Persistent output fluctuations require endogenous price stickiness in the sense that firms choose not to change prices much when they can do so. We find that for a wide range of parameter values, the amount of endogenous stickiness is small. Thus, we find that in a standard quantitative model, staggered price-setting, alone, does not generate business cycle fluctuations.
Keywords
Business cycleEconomicsInvestment (military)Multiplier (economics)Consumption (sociology)EconometricsPersistence (discontinuity)Ask priceMicroeconomicsMonetary economicsMacroeconomicsEconomy
Affiliated Institutions
Related Publications
Stabilizing Powers of Monetary Policy under Rational Expectations
The potential of monetary policy to stabilize fluctuations in output and employment is demonstrated in a stochastic rational expectations model in which firms choose, considerin...
An Intertemporal General Equilibrium Model of Asset Prices
This paper develops a continuous time general equilibrium model of a simple but complete economy and uses it to examine the behavior of asset prices. In this model, asset prices...
Liquidity and the 1987 stock market crash
T he Crash of October 1987 was a puzzling event puzzling not only for what happened on October 19, but also for what subsequently did not happen. In spite of the magnitude and m...
"Rational" Expectations, the Optimal Monetary Instrument, and the Optimal Money Supply Rule
Alternative monetary policies are analyzed in an ad hoc macroeconomic model in which the public's expectations about prices are rational. The ad hoc model is one in which there ...
What really causes large price changes?
We study the cause of large fluctuations in prices on the London Stock Exchange. This is done at the microscopic level of individual events, where an event is the placement or c...
Publication Info
- Year
- 2000
- Type
- article
- Volume
- 68
- Issue
- 5
- Pages
- 1151-1179
- Citations
- 741
- Access
- Closed
External Links
Social Impact
Altmetric
PlumX Metrics
Social media, news, blog, policy document mentions
Citation Metrics
741
OpenAlex
Cite This
V. V. Chari,
Patrick J. Kehoe,
Ellen R. McGrattan
(2000).
Sticky Price Models of the Business Cycle: Can the Contract Multiplier Solve the Persistence Problem?.
Econometrica
, 68
(5)
, 1151-1179.
https://doi.org/10.1111/1468-0262.00154
Identifiers
- DOI
- 10.1111/1468-0262.00154