Working Paper: NBER ID: w0873
Authors: Alan S. Blinder; N. Gregory Mankiw
Abstract: This paper presents a model of a multi-sector economy in which each sector is characterized by a different type of wage or price stickiness. The various sectors experience the same exogenous shocks and have the same money supply. The analysis shows demand shocks pose no serious problems for stabilization policy. In contrast, supply shocks force the policymaker to choose between stability in one sector and stability in another. The analysis also shows the economy cannot be usefully aggregated into a single sector model. Such an aggregation misleads the economist as to the economy's underlying structure and obscures the tradeoffs the policymaker must confront. In particular, a feedback rule chosen on the basis of an aggregate model could be better or worse than a passive policy.
Keywords: stabilization policy; multisector economy; wage stickiness; price stickiness
JEL Codes: E31; E52
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| demand shocks (E39) | stabilization policies (E63) |
| supply shocks (E39) | stabilization policies (E63) |
| type of shock (D80) | policymaker's options (E60) |
| aggregation into a single sector model (E10) | misrepresentation of economy's structure (L16) |
| classical economy (P19) | neutral monetary policy response to demand factors (E19) |
| adverse supply shocks (E00) | stagflation symptoms (E31) |
| unanticipated demand shocks (E39) | real wage increases (J39) |
| real wage increases (J39) | lower employment and output (E24) |
| unanticipated supply shocks (F41) | ambiguous effects on employment (J68) |
| optimal monetary policy response (E63) | varies across different types of economies (P19) |