Title: Pricing, production and persistence
Description: "Though built with  increasingly precise microfoundations, modern optimizing sticky price models  have displayed a chronic inability to generate large and persistent real  responses to monetary shocks, as recently stressed by Chari, Kehoe, and  McGrattan [2000].  This is an ironic finding, since Taylor [1980] and other  researchers were motivated to study sticky price models in part by the  objective of generating large and persistent business fluctuations.       The authors trace this lack of persistence to a  standard view of the cyclical behavior of real marginal cost built into current  sticky price macro models.  Using a fully-articulated general equilibrium model,  they show how an alternative view of real marginal cost can lead to substantial  persistence.  This alternative view is based on three features of the "supply  side" of the economy that we believe are realistic: an important role for  produced inputs, variable capacity utilization, and labor supply variability  through changes in employment.  Importantly, these "real flexibilities" work  together to dramatically reduce the elasticity of marginal cost with respect to  output, from levels much larger than unity in CKM to values much smaller than  unity in this analysis.  These "real flexibilities" consequently reduce the  extent of price adjustments by firms in time-dependent pricing economies and  the incentives for paying fixed costs of adjustment in state-dependent pricing  economies.  The structural features also lead the sticky price model to display  volatility and comovement of factor inputs and factor prices that are more  closely in line with conventional wisdom about business cycles and various  empirical studies of the dynamic effects of monetary shocks"--Federal Reserve Bank of Philadelphia web site.
Subjects: Business cycles, Econometric models, Monetary policy, Prices, Supply-side economics