Recent research has challenged the ability of sticky price general
equilibrium models to generate a contract multiplier, i.e., an effect of a
monetary innovation on output that extends beyond the contract interval. We
show that a simple dynamic general equilbrium model that includes
"Taylor-style" (1980) wage and price contracts can account for a substantial
contract multiplier under various assumptions about the structure of the
capital market. Most interestingly, our results do not rely on a high
intertemporal labor supply elasticity or elastic supply of capital: our
preference specification is standard (logarithmic), and we can account for a
strong contract multiplier even when the aggregate stock of capital is fixed.
Finally, our analysis highlights the importance of the income elasticity of
money demand in accounting for output persistence.
Full paper (601 KB PDF)
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Last update: July 19, 2001