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Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy


We present a model embodying moderate amounts of nominal rigidities which accounts for the observed inertia in inflation and persistence in output. The key features of our model are those that prevent a sharp rise in marginal costs after an expansionary shock to monetary policy. Of these features, the most important are staggered wage contracts of average duration three quarters, and variable capital utilization.


Suggested citation: Christiano, Lawrence J., Martin Eichenbaum and Charles Evans, 2001. “Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy,” Federal Reserve Bank of Cleveland, Working Paper, no. 01-07.

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