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American Economic Journal: Macroeconomics: Vol. 3 No. 1 (January 2011)

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

Article 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

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)

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Authors

Aruoba, S. Borağan (U MD)
Schorfheide, Frank (U PA)

JEL Classifications

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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