Endogenous Growth with Nominal Frictions

Abstract

This paper analyzes monetary business cycles in the framework of a two-sector endogenous growth model with nominal frictions, which stem from overlapping wage contracts. When the accumulation of human capital is considered as home production, it almost insulates the market sector from money supply shocks. Though small, the impulse responses of market output, investment, and paid hours of work are contrary to those observed both in models with exogenous growth and in the data. Both problems are resolved if the production of human capital is considered a market activity, too. This case also provides a better description of the data than a benchmark model with exogenous growth. The additional channel of intertemporal substitution provided by human capital accumulation however, does not introduce greater persistence of monetary shocks.