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The Cost of Nominal Rigidity in NNS Models
Author(s) -
CANZONERI MATTHEW B.,
CUMBY ROBERT E.,
DIBA BEHZAD T.
Publication year - 2007
Publication title -
journal of money, credit and banking
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.763
H-Index - 108
eISSN - 1538-4616
pISSN - 0022-2879
DOI - 10.1111/j.1538-4616.2007.00079.x
Subject(s) - economics , assertion , wage , nominal interest rate , volatility (finance) , government spending , welfare , monetary policy , econometrics , rigidity (electromagnetism) , monetary economics , stabilization policy , macroeconomics , real interest rate , labour economics , computer science , market economy , structural engineering , programming language , engineering
We present a model with Calvo wage and price setting, capital formation, and estimated rules for government spending and monetary policy. Our model captures many aspects of U.S. data, including the volatility that has been observed in various efficiency gaps. We estimate the cost of nominal rigidity—welfare under flexible wages and prices minus welfare with nominal rigidities—to be as much as 3% of consumption each period. Since there are interest rate rules that virtually eliminate this cost, our model suggests that—contrary to Lucas's (2003) assertion—there is considerable room for improvement in demand management policy.