Working Paper: CEPR ID: DP5716
Authors: Giovanni Olivei; Silvana Tenreyro
Abstract: A vast empirical literature has documented delayed and persistent effects of monetary policy shocks on output. We show that this finding results from the aggregation of output impulse responses that differ sharply depending on the timing of the shock: When the monetary policy shock takes place in the first two quarters of the year, the response of output is quick, sizable, and dies out at a relatively fast pace. In contrast, output responds very little when the shock takes place in the third or fourth quarter. We propose a potential explanation for the differential responses based on uneven staggering of wage contracts across quarters. Using a stylized dynamic general equilibrium model, we show that a very modest amount of uneven staggering can generate differences in output responses similar to those found in the data.
Keywords: business cycles; impulse response function; monetary policy; nominal rigidity
JEL Codes: E1; E31; E32; E52; E58
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Monetary policy shocks in the first quarter (E39) | Output (Y10) |
| Monetary policy shocks in the second quarter (E39) | Output (Y10) |
| Monetary policy shocks in the third quarter (E39) | Output (Y10) |
| Monetary policy shocks in the fourth quarter (E39) | Output (Y10) |
| Monetary policy shocks in the first quarter (E39) | Peak effect in output 3 to 4 quarters later (C22) |
| Monetary policy shocks in the second quarter (E39) | Peak effect in output 3 to 4 quarters later (C22) |
| Timing of wage resets (J33) | Differential response of output to monetary policy shocks (E19) |