Nominal Wage Rigidities and the Propagation of Monetary Disturbances

Abstract

Recent research has challenged the ability of sticky price general equilibrium models to generate a contract multiplier, i.e., an effect of a monetary innovation on output that extends beyond the contract interval. We show that a simple dynamic general equilibrium model that includes "Taylor-style" (1980) wage and price contracts can account for a substantial contract multiplier under various assumptions about the structure of the capital market. Most interestingly, our results do not rely on a high intertemporal labor supply elasticity or elastic supply of capital: Our preference specification is standard (logarithmic), and we can account for a strong contract multiplier even when the aggregate capital stock is fixed. Finally, our analysis highlights the importance of the income elasticity of money demand in accounting for output persistence.

JEL Classification: E30