Abstract
SummaryThe aim of this article is to assess the ability of Calvo (1983) type nominal wage contract to generate a positive and long-lasting hump-shaped response of output to a monetary stimulus, as suggested in empirical studies. To this end, we develop a simple cash-in-advance model, in which stochastic nominal wage contracts are introduced. This reduces the negative effect of the so-called inflation tax such that monetary shocks have a positive hump-shaped effect on output. The variance decomposition analysis suggests that monetary shocks explain up to 40% of the total variance of output in the first quarter and have a long lasting effect, in our calibrated economy (namely the German economy). Further, the model also mimics the correlation between output and inflation and real balances observed in Germany. We also propose an evaluation of the effects of variations in the mean duration of contracts on these indicators.
Sign-in/Register to access full text options 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
