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The cost of nominal inertia in NNS models

Author: Matthew B Canzoneri; Robert Cumby; Behzad Diba; National Bureau of Economic Research.
Publisher: Cambridge, Mass. : National Bureau of Economic Research, 2004.
Series: Working paper series (National Bureau of Economic Research), no. 10889.
Edition/Format:   eBook : Document : EnglishView all editions and formats
Database:WorldCat
Summary:
"We calculate the welfare cost of nominal inertia in a New Neoclassical Synthesis model with wage and price stickiness, capital formation, and empirically estimated rules for government spending and the cental bank's interest rate policy. We calibrate our model to U.S. data, and we show that it captures many aspects of the U.S. business cycle. Moreover, our model is capable of generating the kind of volatility that  Read more...
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Material Type: Document, Internet resource
Document Type: Internet Resource, Computer File
All Authors / Contributors: Matthew B Canzoneri; Robert Cumby; Behzad Diba; National Bureau of Economic Research.
OCLC Number: 57117289
Description: 1 online resource (49 pages) : color illustrations.
Series Title: Working paper series (National Bureau of Economic Research), no. 10889.
Responsibility: Matthew B. Canzoneri, Robert E. Cumby, Behzad T. Diba.

Abstract:

"We calculate the welfare cost of nominal inertia in a New Neoclassical Synthesis model with wage and price stickiness, capital formation, and empirically estimated rules for government spending and the cental bank's interest rate policy. We calibrate our model to U.S. data, and we show that it captures many aspects of the U.S. business cycle. Moreover, our model is capable of generating the kind of volatility that has been observed in the efficiency gaps emphasized by Erceg, Henderson and Levin (2000) and Gali, Gertler and Lopez-Salido (2002). We also highlight some of the empirical shortcomings of the model; in particular, demand side shocks appear to be either missing or improperly modeled. We calculate the cost of nominal inertia under two specifications of monetary policy. The bottom line is that, under our preferred specification of monetary policy, the model implies a conservative estimate of the cost that is twenty to sixty times larger than Lucas's (2003) estimate: the "average" household in our model would be willing to give up one to three percent of consumption each period to be free of the effects of wage and price stickiness. Wage inertia appears to be the major source of these welfare costs"--National Bureau of Economic Research web site.

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