Structure from Shocks
2002; Volume: 88; Issue: 4 Linguagem: Inglês
ISSN
2163-4556
Autores Tópico(s)Economic theories and models
ResumoArguments favoring Keynesian models that incorporate sticky prices over real business cycle models are often made on the grounds that the correlations and impulse response patterns found in the latter are inconsistent with the data. Critics further assert that these correlations and patterns are consistent with models that include price stickiness. Gali (1999) constitutes a prominent example of this reasoning. He observes empirically that conditional on a technology shock the contemporaneous correlation between labor effort and labor productivity is negative. He then makes the case that this observation implies that prices are sticky. Basu, Fernald, and Kimball (1998), using different identifying assumptions, also find this correlation in the data and make a similar assertion. Mankiw (1989) provides still another example of this type of reasoning. He argues that RBC models imply, counterfactually, that inflation and real activity are negatively correlated and so are inconsistent with the existence of a Phillips curve, which would not be the case in sticky price models. But statements like those of Gali, Basu, Fernald, and Kimball, and Mankiw assume a certain characterization of monetary policy. This assumption is best demonstrated by Gali (1999), who uses intuition based on a money supply rule to persuade us that sticky prices are needed to generate a fall in employment in the presence of positive technology shocks. The fall in employment together with an increase in output produces the negative correlation between employment and labor productivity. However, under a monetary policy that employs the interest rate rule estimated in Clarida, Gali, and Gertler (1998), positive technology shocks produce an increase in both employment and labor productivity. Given the correct estimation of the rule, one must question the conclusion drawn by Gali (1999) and the assertions of Basu and Kimball (1998).1 Furthermore, work by Christiano and Todd (1996) is able to generate within the confines of the RBC paradigm the labor-productivity correlation estimated by Gali. Thus, it is clear that discriminating among classes of models based on a few correlations is a perilous enterprise, especially when those correlations are sensitive to the nature of monetary policy. Within the confines of a model similar to that used by Gali (1999), I show the importance of the specification of monetary policy for the dynamic behavior of the economy. The model includes the more realistic specification of staggered price-setting rather than one-period price rigidity and includes capital accumulation. In all other respects the model is true to Gali's original specification. One can see the effects of the systematic portion of policy by examining how the model economy reacts to a technology shock under different specifications of a monetary policy rule. As in Dotsey (1999a), the experiments show that, in the presence of significant linkages between real and nominal variables, the way shocks propagate through an economy is intimately linked to the systematic behavior of the monetary authority. Thus, even correlations among real variables may be influenced by policy. In particular, the justification put forth by both Gali and Basu and Kimball for favoring a sticky-price model over an RBC model no longer applies. Also, the correlations between real and nominal variables are sensitive to the specification of the central bank's feedback rule. Depending on the form of the monetary policy rule, the model is capable of producing either positive or negative correlations between output and inflation irrespective of whether prices are sticky or flexible. Therefore, Mankiw's reasoning for favoring a sticky-price model over a flexible-price model is not persuasive.2 These latter results are reminiscent of the arguments made by King and Plosser (1984) concerning the correlations between money balances and output. Their article shows that the positive correlation between money and output need not reflect a causal role for money in the behavior of output. …
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