Working Paper: CEPR ID: DP1763
Authors: Guido Ascari; Neil Rankin
Abstract: We study the output costs of a reduction in monetary growth in a dynamic general equilibrium model with staggered wages. As in John Taylor?s approach, the money wage is fixed for two periods, but in our model it is also chosen according to intertemporal optimization, as are consumption and money demand. Agents have labour market monopoly power. We show that the introduction of microfoundations helps to resolve the puzzle recently raised by Laurence Ball, namely that disinflation in staggered pricing models causes a boom. In our model disinflation, whether unanticipated or anticipated, unambiguously causes a slump.
Keywords: staggered wages; dynamic general equilibrium; disinflation
JEL Codes: E31; E52
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| disinflation (anticipated or unanticipated) (E31) | slump in output (E23) |
| anticipation of lower future inflation (D84) | raises demand for current real balances (E41) |
| raises demand for current real balances (E41) | necessitates reduction in current output (F32) |
| anticipation of lower future inflation (D84) | lower prices in advance of policy change (P22) |
| lower prices in advance of policy change (P22) | stimulate output (C67) |
| immediate and unanticipated cuts in monetary growth (E59) | contractionary effect (E62) |
| preannounced disinflation (E31) | cannot cause a boom (Q33) |
| disinflation dynamics (E31) | persistent slump rather than a boom (E32) |
| time preference rates and aggregate demand dynamics (E41) | significance in analysis (C38) |