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Stochastic Nominal Wage Contacts in a Cash-in-Advance Model

Author

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  • Collard, Fabrice

    (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES); Université de Paris I, MAD)

  • Ertz, Guy

    (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES))

Abstract

We build a simple cash-in-advance model for the German economy, in which we introduce stochastic nominal wage contracts. This allows to weaken the negative effect of the inflation tax such that monetary shocks exert a positive effect on output dynamics. The nominal wage contract model is able to mimic the correlation of inflation and real balances with output. It also lowers the standard deviation of inflation relative to that of output. Further, the variance decomposition analysis indicates that in this setting, monetary shocks explain between 30% and 45% of output volatility in the first quarter. Moreover, it indicates that this model generates a long lasting effect of monetary shocks on output dynamics.

Suggested Citation

  • Collard, Fabrice & Ertz, Guy, 1996. "Stochastic Nominal Wage Contacts in a Cash-in-Advance Model," LIDAM Discussion Papers IRES 1997017, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES), revised 00 Jul 1997.
    • Handle: RePEc:ctl:louvir:1997017
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    References listed on IDEAS

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    More about this item

    Keywords

    Business Cycle; Money; Persistence; Nominal Wage Contracts;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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