Reevaluating the Role of Cost-Push and Technology Shocks in a Sticky Price Model

Abstract

This paper sets up a nominal price rigidity model with catching up with the Joneses to address the relative importance of technology, cost-push, and monetary policy shocks in driving business cycles. This paper shows that the technology shock is the most important source of the post-war U.S. output and inflation variations, and the cost-push shock plays a moderate role in output variations in the model with habit. This finding contrasts with Ireland's results, wherein the cost-push shock explains 80% of output variations in the long run in the sticky price model without habit in consumption.