wheat from chaff meta analysis as quantitative literature review abstract this paper presents and develops a quantitative method of literature reviewing and evaluating empirical research meta regression analysis or mra economics is theory driven yet we must learn empirically if economics is to advance mra offers a more objective statistical method to summarize our empirical knowledge and to explain the wide study to study variation in economic research mra is used to assess the evidence for ricardian equivalence and its findings are contrasted to those of conventional narrative review furthermore mra establishes a platform from which to distinguish genuine empirical effect from the exploitable specification error that infests applied econometrics

income inequality and growth does the relationship vary with the income level abstract for three different specifications of a cross country growth model the coefficient of initial income inequality is remarkably similar for high and low income countries contrary to some recent suggestions in the literature but varies markedly across models

can we explain inflation persistence in a way that is consistent with the microevidence on nominal rigidity this paper adopts the impulse response methodology to under stand inflation persistence it has often been argued that existing models of pricing fail to explain the persistence that we observe we adopt a common general framework which allows for an explicit modelling of the distribution of contract lengths and for different types of price setting we also evaluate how far the theories are consistent with recent evidence on price and wage rigidity we find that allowing for a distribution of durations can take us a long way to solving the puzzle of inflation persistence but not all the way yet

occupational choice and the process of development this paper models economic development as a process of institutional transformation by focusing on the interplay between agents occupational decisions and the distribution of wealth because of capital market imperfections poor agents choose working for a wage over self employment and wealthy agents become entrepreneurs who monitor workers only with sufficient inequality however will there be employment contracts otherwise there is either subsistence or self employment thus in static equilibrium the occupational structure depends on distribution since the latter is itself endogenous we demonstrate the robustness of this result by extending the model dynamically and studying examples in which initial wealth distributions have long run effects in one case the economy develops either widespread cottage industry self employment or factory production employment contracts depending on the initial distribution in the other example it develops into prosperity or stagnation

the quantitative analytics of the basic neomonetarist model this paper constructs a dynamic macroeconomic model with less than perfect price flexibility which has a classical side consistent with real business cycle theory augmented by investment adjustment costs increasing returns to scale and a new flexible formalization of imperfect competition something akin to the classical dichotomy is justified by a mode of approximation appropriate for a model in which one state variable adjusts quickly while another state variable adjusts slowly even with investment adjustment costs monetary expansions are found to raise the real interest rate the determinants of real rigidity and the macroeconomic rate of price adjustment are investigated copyright 1995 by ohio state university press

endogenous objectives and the evaluation of targeting rules for monetary policy recent research in monetary economics has followed the advice of mccallum 1988 robustness properties of a rule for monetary policy carnegie rochester conference series on public policy 29 173 203 and investigated the robustness properties of monetary policy rules by evaluating them in a variety of models evaluation across models is typically based on an exogenously specified loss function however the theory on which many recent monetary policy models are based implies that changes in the structure of the model also have consequences for the policy objectives the central bank should pursue objectives are endogenous not exogenous to the model in this paper i investigate the impact of endogenous objectives on the evaluation of targeting rules for monetary policy r 2005 elsevier b v all rights reserved

a meta analytic reassessment of the effects of inequality on growth this paper develops a meta analysis of the empirical literature that estimates the effect of inequality on growth it covers studies published in scientific journals during 1994 2014 that examine the impact on growth of inequality in income land and human capital distribution we find traces of publication bias in this literature as authors and journals are more willing to report and publish statistically significant findings and the results tend to follow a predictable time pattern over time according to which negative and positive effects are cyclically reported after correcting for these two forms of publication bias we conclude that the high degree of heterogeneity of the reported effect sizes is explained by study conditions namely the structure of the data the type of countries included in the sample the inclusion of regional dummies the concept of inequality and the definition of income in particular our meta regression analysis suggests that cross section studies systematically report a stronger negative impact than panel data studies the effect of inequality on growth is negative and more pronounced in less developed countries than in rich countries the inclusion of regional dummies in the growth regression of the primary studies considerably weakens such effect expenditure and gross income inequality tend to lead to different estimates of the effect size land and human inequality are more pernicious to subsequent growth than income inequality is we also find that the estimation technique the quality of data on income distribution and the specification of the growth regression do not significantly influence the estimation of the effect sizes these results provide new insights into the nature of the inequality growth relationship and offer important guidelines for policy makers

theoretical analysis regarding a zero lower bound on nominal interest rates this paper explores several issues concerning a possible zero lower bound zlb including its theoretical rationale the magnitude of effects of low sustained inflation on real interest rates the validity of analyzing monetary policy in models with no monetary variables and the dynamic stabilizing properties of taylor rules in a zlb context the most important argument however is that if the short nominal rate is immobilized at zero there nevertheless exists a route for monetary stabilization policy to be effective via the foreign exchange market its quantitative importance is examined in a calibrated optimizing open economy model

dynamic inconsistencies counterfactual implications of a class of rational expectations models a number of recent papers have developed dynamic macroeconomic models that incorporate rational expectations and optimizing foundations while the theoretical motivation behind these models is sound the dynamic implications of many of the specifications that assume rational expectations and optimizing behavior can be seriously at odds with the data for both inflation and real side variables exhibit gradual and hump shaped responses to real and monetary shocks for models that are intended for monetary policy analysis these dynamic shortcomings should be considered quite serious when monetary policy has only short run effects on real variables the inability to approximately capture the short run responses of inflation or real variables to policy shocks makes a model unsuitable for policy analysis this paper identifies a simple feature common to many dynamic specifications for prices and real variables that causes the problem the paper also discusses several potential solutions to the problem including alterations to the expectations assumption to the order of differencing implicit in the model and to the underlying behavioral assumptions this abstract was borrowed from another version of this item

supply side effects of monetary policy and equilibrium multiplicity abstract empirical evidence indicates that changes in the nominal interest rate significantly affect lending costs of firms introducing working capital into an otherwise conventional new keynesian model active interest rate policy remains necessary but should be moderate to ensure real determinacy the likelihood for the latter can approach zero when utility is linear in leisure

the hump shaped behavior of inflation and a dynamic externality we propose a general equilibrium model that explains the empirical evidence of the hump shaped response of inflation to a monetary policy shock the model replaces backward looking indexation a la christiano et al 2005 nominal rigidities and the dynamic effect of a shock to monetary policy journal of political economy 113 1 1 45 with a dynamic externality into the production function of firms the model armed with sticky wages and variable capital utilization has two offsetting effects on real marginal cost over the business cycle first increasing factor prices raise real marginal cost in response to an expansionary monetary policy shock in the intermediate run second a dynamic externality reduces real marginal cost in the short run because it raises productivity in response to an increase in output following the shock overall the resulting short run decrease and intermediate run increase in marginal cost replicate the hump shaped behavior of inflation under purely forward looking price and wage phillips curves

experimental evidence on the persistence of output and inflation this article presents experimental evidence from a monetary sticky price economy in which output and inflation depend on expected future inflation rational inflation expectations do not allow for persistent deviations of output and inflation following a monetary shock in the experimental sessions however output and inflation display considerable persistence and regular cyclical patterns

sticky price models of the business cycle can the contract multiplier solve the persistence problem we construct a quantitative equilibrium model with firms setting prices in a staggered fashion and use it to ask whether monetary shocks can generate business cycle fluctuations these fluctuations include persistent movements in output along with the other defining features of business cycles like volatile investment and smooth consumption we assume that prices are exogenously sticky for a short time persistent output fluctuations require endogenous price stickiness in the sense that firms choose not to change prices much when they can do so we find that for a wide range of parameter values the amount of endogenous stickiness is small thus we find that in a standard quantitative model staggered price setting alone does not generate business cycle fluctuations

the role of boundary solutions in principal agent problems of the holmstrom milgrom type abstract the paper extends the holmstrom milgrom b holmstrom p milgrom aggregation and linearity in the provision of intertemporal incentives econometrica 55 1987 303 328 analysis of intertemporal incentive provision to allow for the implementation of actions on the boundary of the feasible set boundary actions provide the principal with some freedom in choosing incentive schemes this can be used to reduce premia the paper characterizes optimal incentive schemes for the continuous time brownian motion model and its discrete time approximations linearity of incentive schemes in accounts is confirmed however for models with effort costs depending only on mean returns the availability of boundary actions destroys the linearity of optimal incentive schemes in profits

income distribution and macroeconomics this paper analyzes the role of wealth distribution in macroeconomics through investment in human capital it is shown that in the presence of credit markets imperfections and indivisibilities in investment in human capital the initial distribution of wealth affects aggregate output and investment both in the short and in the long run as there are multiple steady states this paper therefore provides an additional explanation for the persistent differences in per capita output across countries furthermore the paper shows that cross country differences in macroeconomic adjustment to aggregate shocks can be attributed among other factors to differences in wealth and income distribution across countries

new ways of looking at old issues inequality and growth abstract the paper uses new cross country data on income and asset land distribution to show that i there is a strong negative relationship between initial inequality in the asset distribution and long term growth ii inequality reduces income growth for the poor but not for the rich and iii available longitudinal data provide little support for the kuznets hypothesis policies that increase aggregate investment and facilitate acquisition of assets by the poor might thus be doubly beneficial for growth and poverty reduction

macroeconomic impacts of fdi in transition economies a meta analysis summary in this paper we conduct a meta analysis of the literature that empirically examines the impact of foreign direct investment fdi on economic growth in central and eastern europe and the former soviet union we found that existing studies indicate a growth enhancing effect of fdi in the region as a whole the results of our meta regression analysis suggest that the effect size and statistical significance of the reported estimates strongly depend on study conditions we also found that the relevant studies fail to present genuine evidence of a non zero fdi effect more research is necessary to identify the true effect

inflation and output dynamics with state dependent pricing decisions this paper studies a state dependent pricing model in which firms face a fixed cost of changing their pricing plans a pricing plan specifies an entire sequence of time varying future prices allowing firms to choose a pricing plan rather than a single price generates inflation inertia in the response of the economy to small changes in the growth rate of money allowing firms to choose when to change their pricing plan generates a non linear response of inflation and output to small and large changes in the money growth rate the non linear solution method also reveals that the model generates an asymmetric response of output and inflation to monetary expansions and contractions

the optimal monetary response to technology shocks i introduction during the past decade many economists adopted the view that shocks to the aggregate production function or technology shocks represent the dominant source of fluctuations in the united states economy as noted by shapiro 1987 a number of elements came together to shape this view most important a series of severe supply shocks hit the economy during the 1970s standard keynesian models with their emphasis on the demand side had great difficulty tracking the economy s response to these shocks the view solidified after kydland and prescott 1982 demonstrated that many features of the business cycle can be replicated in a model where technology shocks are the only source of fluctuations kydland and prescott s work launched the now extensive literature on real business cycles surveyed by mccallum 1989 the observation that supply side disturbances are important in generating business cycles however need not imply that monetary factors play no role in accounting for variations in economic activity greenwood and huffman 1987 and cooley and hansen 1989 add cash in advance constraints to otherwise standard real business cycle models as a simple way of including the nominal sector in these cash in advance models monetary shocks have little effect on the cyclical behavior of real variables these models preserve the emphasis on technology shocks in explaining the business cycle nevertheless the models show how sustained inflation can affect the real economy by acting as a distortionary tax on productive activity the models of greenwood and huffman and cooley and hansen imply that optimal monetary policy involves a steady contraction of the money supply that keeps the nominal interest rate at zero as called for by friedman 1969 this optimal policy makes no attempt to respond to technology shocks instead it simply removes the distortionary inflation tax more recently cho and cooley 1992 yun 1994a and dow 1995 have investigated the effects of introducing various forms of price rigidity into monetary versions of the real business cycle model technology shocks continue to play a major role in these studies but the presence of nominal rigidities allows monetary shocks to affect the business cycle as well in fact these studies show that the addition of price rigidity improves the model s ability to match the cyclical properties of the data this paper complements these studies by deriving the implications of nominal price rigidity for optimal monetary policy i begin by outlining a model that shares the basic features of those cited above including technology shocks a cash in advance constraint and nominal price rigidity in the model both technology and monetary shocks have important effects on aggregate output and employment unlike flexible price cash in advance models for instance the model developed here gives rise to a phillips curve relationship between money and output the model is used to answer the following question does the presence of nominal price rigidity rationalize a monetary policy that responds actively to technology shocks or does the optimality of friedman s constant money growth rule still apply the results show that optimal policy does in fact exploit the monetary authority s ability to influence the real economy when prices are sticky that is the optimal policy is activist on the other hand the results also show that the friedman rule while no longer optimal comes very close to the optimum in welfare terms in this sense the main policy implication of flexible price cash in advance models appears robust to the introduction of nominal price rigidity section ii presents the model section iii describes the key features of its equilibrium section iv derives the optimal activist policy and compares its performance to that of the friedman rule section v concludes ii the model the economic environment infinitely lived households firms and a monetary authority populate an economy where time periods are indexed by t 0 1 2

declining bias and gender wage discrimination a meta regression analysis this paper extends tests and revises a previous meta regression analysis of the gender wage gap stanley and jarrell 1998 we find that there remains a strong though dampened tendency for discrimination estimates to fall and male researchers still report significantly larger amounts of wage discrimination against women this extensive research base containing 104 estimates suggests that there is less need to correct for selection bias an indirect sign of lessened discrimination there is evidence that gender research is changing and improving although gender wage discrimination has lessened the research base still finds a significant gender wage inequality

education and economic growth a meta regression analysis summary this paper surveys the literature which examines the effect of education on economic growth specifically we apply meta regression analysis to 57 studies with 989 estimates and show that there is substantial publication selection bias toward a positive impact of education on growth once we account for this the genuine growth effect of education is not homogeneous across studies but varies according to several factors specifically it is attributed to differences in education measurement and study characteristics mainly model specification as well as type of data used and the quality of research outlets where studies are published e g academic journals vs working papers

inventories sticky prices and the persistence of output and inflation post war business cycle fluctuations of output and inflation are remarkably persistent many recent sticky price models however grossly underpredict this persistence we assess whether adding inventories to a standard sticky price model raises the persistence of output and inflation for this addition we consider a shopping cost model in the model consumers find shopping activities costly and the cost of shopping depends on the stock of goods available in this context producers manage inventories to smooth production and to affect the cost of shopping we find that the shopping cost model generates a persistence for output and inflation that matches the persistence observed in the post 1985 us data

long run income and interest elasticities of money demand in the united states econometric techniques designed to accommodate nonstationary data are used to reexamine the stability of interest and income elasticities of money demand in the united states estimates based on postwar monthly data reveal a stable relationship between m1 velocity and various measures of interest rates that proxy the opportunity cost of holding money balances tests for the existence of cointegration and methods used to estimate the income and interest elasticities are based on procedures prescribed by soren johansen 1988 corresponding error correction estimates offer insight as to the dynamics of the process that maintains the equilibrium relation between velocity and interest rates copyright 1991 by mit press

how much persistence should sticky price models generate to match us data abstract a number of recent papers find that sticky price models fail to explain the persistence of output and inflation we argue that this failure is partially attributable to low frequency fluctuations present in us data but absent from sticky price models

partisan bias in inflation expectations we examine partisan bias in inflation expectations our dataset includes inflation expectations of the new york fed s survey of consumer expectations over the period june 2013 to june 2018 the results show that inflation expectations were 0 46 points higher in republican dominated than in democratic dominated us states when barack obama was us president compared to inflation expectations in democratic dominated states inflation expectations in republican dominated states declined by 0 73 points when donald trump became president we employ the blinder oaxaca decomposition method to disentangle the extent to which political ideology and other individual characteristics predict inflation expectations around 25 of the total difference between inflation expectations in democratic dominated versus republican dominated states is based on how partisans respond to changes in the white house s occupant partisan bias the results also corroborate the belief that voters misperceptions of economic conditions decline when the president belongs to the party that voters support

reconsideration of the p bar model of gradual price adjustment abstract this paper compares the p bar model of price adjustment with the currently dominant calvo specification theoretically the p bar model is more attractive as it depends on adjustment costs for physical quantities rather than nominal prices while incorporating a one period information lag furthermore the resulting adjustment relation is more completely free of money illusion in terms of dynamic relationships and therefore satisfies the natural rate hypothesis of lucas 1972a econometric testing of the natural rate hypothesis in eckstein o ed the econometrics of price determination board of governors of the federal reserve system which is not satisfied by the calvo model in any of its variants along the way it shows that both the p bar and calvo models can be formulated in distinct versions in which current real wages are or are not allocative quantitatively for a given calibration of the demand parameters the implied time series properties of the inflation rate output gap and nominal interest rate are determined for various policy parameters and are compared with quarterly data for the us economy neither model dominates but overall the comparison seems somewhat more favorable to the p bar model and certainly does not provide support for the dominant position held by the calvo model in current monetary policy analysis

the demand and liquidity effects of monetary shocks abstract this paper examines the effect of a monetary shock in a stochastic growth model with a cash in advance constraint and a financial intermediary it explores the differences between the results of restrictions on nominal price adjustment the demand effect and restrictions on savings behavior the liquidity effect it is found that the model that produces the appropriate response to a temporary monetary shock includes both demand and liquidity effects

inequality and growth uncovering the main conclusions from the empirics abstractthis paper is a critical survey of the empirical literature on the effects of inequality on economic growth we conclude that it is most likely that the disparities found in the results are due to differences in the type of countries and time periods included in the samples the variable used to measure inequality the structure of the data and the estimation techniques these findings suggest that the mechanisms that link inequality to growth are likely to operate differently in different circumstances an element that may offer important guidelines for both policy makers and researchers

money prices interest rates and the business cycle the mechanisms governing the relationship of money prices and interest rates to the business cycle are the most studied and most disputed topics in macroeconomics in this paper we first document key empirical aspects of this relationship we then ask how well three benchmark rational expectations macroeconomic models a real business cycle model a sticky price model and a liquidity effect model account for these central facts while the models have diverse successses and failures none can account for the fact that real and nom inal interest rates are inverted leading indicators of real economic activity that is none of the models captures the post war u s business cycle fact that a high real or nominal interest rate in the current quarter predicts a low level of real economic activity two to four quarters in the future i introduction the positive correlation of monetary aggregates and real economic activity over the course of many business cycles is a key empirical fact about the u s economy indeed the dynamic dimension of this covariation is so strong and stable that a monetary variable has long been included in the commerce department s index of leading economic indica tors while this pattern of cyclical comovement is widely agreed upon its interpretation is not some macroeconomists view money as purely passive with a positive response to varying levels of economic activity producing the positive correlation others view changes in the quantity of money as an important perhaps dominant source of economic fluctua tions frequently the real effects of monetary changes are suggested to arise from frictions in commodity labor or financial markets in economic theories that describe the influence of these frictions the transmission mechanism from monetary changes to real activity is typically viewed as involving interest rates and the price level the primary goal of this paper is to evaluate three models that explain the link between money prices interest rates and the business cycle we do this in three steps first we docu ment the cyclical behavior of these variables in the united states over the postwar period second we construct three quantitative rational expectations models of macroeconomic activity i a real business cycle model with endogenous money ii a model of commodity market frictions with mon etary non neutralities arising from gradual adjustment of goods prices and iii a model of financial market frictions with monetary non neutralities arising from gradual adjust ments of portfolios finally we compare the models predic tion for the business cycle behavior of money prices and interest rates with the data in exploring the predictions of these models we take the stock of money to be one of several exogenous variables in the system all of our models are capable of generating a forecasting role for money relative to real economic activity similar to that found in the u s data in the real business model monetary changes can forecast real activity because productivity is related to many underlying sources of shocks and because these real shocks also affect the money stock in the models with sticky prices and liquidity effects short hand names for the models with frictions in the com modity and financial markets monetary changes have an additional direct positive effect on aggregate output the outline of the paper is as follows section ii describes the data and documents its business cycle characteristics section iii outlines the three macroeconomic models and develops the particular quantitative versions of the models used in our analysis our main empirical results are pre sented in section iv and section v summarizes our results and concludes

sticky price and limited participation models of money a comparison abstract we provide new evidence that models of the monetary transmission mechanism should be consistent with at least the following facts after a contractionary monetary policy shock the aggregate price level responds very little aggregate output falls interest rates initially rise real wages decline by a modest amount and profits fall we compare the ability of sticky price and limited participation models with frictionless labor markets to account for these facts the key failing of the sticky price model lies in its counterfactual implications for profits the limited participation model can account for all the above facts but only if one is willing to assume a high labor supply elasticity 2 percent and a high markup 40 percent the shortcomings of both models reflect the absence of labor market frictions such as wage contracts or factor hoarding which dampen movements in the marginal cost of production after a monetary policy shock 1997 elsevier science b v

sluggish inflation and optimizing models of the business cycle abstract many researchers have added sticky prices to quantitative business cycle models i simulate several of these models in order to evaluate their success at reproducing two features of us data the lagged reaction of inflation to monetary growth and the persistence of inflation

an optimizing is lm specification for monetary policy and business cycle analysis we ask whether relations of the is lm type can sensibly be used for the aggregate demand portion of a dynamic optimizing general equilibrium model intended for analysis of issues regarding monetary policy and cyclical fluctuations the main result is that only one change the addition of a term regarding expected future income is needed to make the is function match a fully optimizing model whereas no changes are needed for the lm function this modification leads to a dynamic forward looking model of aggregate demand that is tractable and usable with a wide variety of aggregate supply specifications theoretical applications concerning price level determinacy and gradual price adjustment are included

money and interest in a cash in advance economy the authors analyze an aggregative general equilibrium model in which the use of money is motivated by a cash in advance constraint applied to purchases of a subset of consumption goods the system is subject to both real and monetary shocks which are economy wide and observed by all they develop methods for verifying the existence of characterizing and explicitly calculating equilibria copyright 1987 by the econometric society

monetary policy and economic fluctuations in a sticky price model abstract this paper examines a simple monetary optimizing model with sticky prices two types of monetary policy rules are considered constant money growth rules and interest rate feedback taylor type rules in the case of constant money growth rules we show the existence of limit cycles through the hopf bifurcation theorem on the other hand in the case of the interest rate feedback rules we show that active monetary policy leads to the determinacy of equilibrium path while passive monetary policy induces economic fluctuations

aggregation and linearity in the provision of intertemporal incentives we consider the problem of providing incentives over time for an agent with constant absolute risk aversion the optimal compensation scheme is found to be a linear function of a vector of n accounts which count the number of times that each of the n kinds of observable events occurs the number n is independent of the number of time periods so the accounts may entail substantial aggregation in a continuous time version of the problem the agent controls the drift rate of a vector of accounts that is subject to frequent small random fluctuations the solution is as if the problem were the static one in which the agent controls only the mean of a multivariate normal distribution and the principal is constrained to use a linear compensation rule if the principal can observe only coarser linear aggregates such as revenues costs or profits the optimal compensation scheme is then a linear function of those aggregates the combination of exponential utility normal distributions and linear compensation schemes makes computations and comparative statics easy to do as we illustrate we interpret our linearity results as deriving in part from the richness of the agent s strategy space which makes it possible for the agent to undermine and exploit complicated nonlinear functions of the accounting aggregates

sticky price and sticky information price setting models what is the difference using a partial equilibrium framework mankiw and reis 2002 show that a sticky information model can generate a lagged and gradual inflation response after a monetary policy shock whereas a sticky price model cannot our paper demonstrates that that finding is sensitive to their model s parameterization to determine a plausible parameterization we specify a general equilibrium model with sticky information in that model we find that inflation peaks only one period after a monetary disturbance a sensitivity analysis of our results reveals that the inflation peak is delayed by including real rigidities when the monetary policy instrument is money growth whereas inflation peaks immediately when the policy instrument is the nominal interest rate

the institutional foundations of inequality and growth abstract after a decade of research the effect of inequality on long run economic growth remains unresolved in part because researchers have treated omitted variable bias as an estimation problem rather than a deeper question of causality in this article we argue that the key omitted variable is the quality of economic institutions using both cross country and panel data specifications we find no direct effect of inequality on growth in the long run rather the protection of property rights simultaneously raises growth rates and reduces income inequality we interpret these findings as evidence that insecure property rights disproportionately disadvantage the poor

an analysis of the principal agent problem most analyses of the principal agent problem assume that the principal chooses an incentive scheme to maximize expected utility subject to the agent s utility being at a stationary point an important paper of mirrlees has shown that this approach is generally invalid we present an alternative procedure if the agent s preferences over income lotteries are independent of action we show that the optimal way of implementing an action by the agent can be found by solving a convex programming problem we use this to characterize the optimal incentive scheme and to analyze the determinants of the seriousness of an incentive problem

the effects of real and monetary shocks in a business cycle model with some sticky prices an established characteristic of macroeconomic fluctuations is the strong positive correlation between variations in the money stock and variations in production income and employment at business cycle frequencies this finding has motivated an enormous literature that has studied the effects of monetary policy disturbances on the real economy and in particular the role of money in business cycles several classes of monetary business cycle models have been developed that feature different channels through which monetary policy can have real effects one model that has been used widely is the keynesian model in which monetary shocks can have important effects on allocations because there are nominal rigidities in prices and or wages the keynesian assumption of sticky nominal prices is often motivated by reference to studies that have analyzed the frequency of nominal price changes the broad conclusion that emerges from this literature is that there are a number of goods that have prices that appear to change infrequently for example carlton 1989 has reported slow changes in nominal transactions prices for producers goods even without long term relationships between buyers and sellers and has documented that delivery lags and other product characteristics frequently change before nominal prces change similarly blinder s survey 1991 of firms shows that prices for many goods change only about once per year while this evidence

inflation output and markup dynamics with forward looking wage and price setters abstract medium scale new keynesian models are sometimes criticized for their use of backward looking wage and price setting mechanisms and for assuming several types of disturbances including some that would be difficult to interpret economically we propose a dsge model with purely forward looking wage and price setters and parsimoniously chosen disturbances our model emphasizes an interplay between production firms networking and working capital firms can use working capital to finance all or a fraction of their outlays on production factors and use the output of other firms as an input in a what is often called a roundabout production structure our model generates a response of inflation which is mute on impact of a monetary policy shock but highly persistent and very hump shaped afterwards it also yields a large contract multiplier for output two times larger than the one implied by a model relying on indexation only we also show that the response of the price markup can be positive on impact of an expansionary monetary policy shock which differs from the standard countercyclical markup channel emphasized in conventional new keynesian models in contrast to models relying on indexation to past inflation our model produces non inertial responses of inflation to productivity and investment shocks a finding which is broadly consistent with the existing var evidence