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Sticky price models of the business cycle: Can the contract multiplier solve the persistence problem?

Chari, VV; Kehoe, PJ; McGrattan, ER; (2000) Sticky price models of the business cycle: Can the contract multiplier solve the persistence problem? Econometrica , 68 (5) pp. 1151-1179. 10.1111/1468-0262.00154. Green open access

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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.

Type: Article
Title: Sticky price models of the business cycle: Can the contract multiplier solve the persistence problem?
Open access status: An open access version is available from UCL Discovery
DOI: 10.1111/1468-0262.00154
Publisher version: https://doi.org/10.1111/1468-0262.00154
Language: English
Additional information: The copyright to this article is held by the Econometric Society, http://www.econometricsociety.org/. It may be downloaded, printed and reproduced only for personal or classroom use. Absolutely no downloading or copying may be done for, or on behalf of, any for-profit commercial firm or for other commercial purpose without the explicit permission of the Econometric Society. For this purpose, contact the Editorial Office of the Econometric Society ateconometrica@econometricsociety.org.
Keywords: Staggered price-setting, endogenous price stickiness, monetary business cycles
UCL classification: UCL
UCL > Provost and Vice Provost Offices > UCL SLASH
UCL > Provost and Vice Provost Offices > UCL SLASH > Faculty of S&HS
URI: https://discovery.ucl.ac.uk/id/eprint/10054415
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