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  3. American Economic Journal: Macroeconomics
  4. January 2011
  5. Sticky Prices versus Monetary Frictions: An Estimation of Policy Trade-Offs

Sticky Prices versus Monetary Frictions: An Estimation of Policy Trade-Offs

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Abstract

We develop a two-sector monetary model with a centralized and decentralized market. Activities in the centralized market resemble those in a standard New Keynesian economy with price rigidities. In the decentralized market agents engage in bilateral exchanges for which money is essential. This paper is the first to formally estimate such a model, evaluate its fit based on postwar US data, and assess its money demand properties. Steady-state welfare calculations reveal that the distortions created by the monetary friction may be of similar magnitude as the distortions created by the New Keynesian friction. (JEL C54, E12, E31, E41, E52)

Citation

Aruoba, S. Borağan, and Frank Schorfheide. 2011. "Sticky Prices versus Monetary Frictions: An Estimation of Policy Trade-Offs." American Economic Journal: Macroeconomics, 3 (1): 60-90. DOI: 10.1257/mac.3.1.60

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JEL Classification

  • C54 Quantitative Policy Modeling
  • E12 General Aggregative Models: Keynes; Keynesian; Post-Keynesian
  • E31 Price Level; Inflation; Deflation
  • E41 Demand for Money
  • E52 Monetary Policy
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