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

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

Research output: Contribution to journalArticlepeer-review

280 Scopus citations

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.

Original languageEnglish (US)
Pages (from-to)1151-1179
Number of pages29
JournalEconometrica
Volume68
Issue number5
DOIs
StatePublished - 2000

Bibliographical note

Copyright:
Copyright 2017 Elsevier B.V., All rights reserved.

Keywords

  • Endogenous price stickiness
  • Monetary business cycles
  • Staggered price-setting

Fingerprint Dive into the research topics of 'Sticky price models of the business cycle: Can the contract multiplier solve the persistence problem?'. Together they form a unique fingerprint.

Cite this