Monetary Shocks with Nominal Wage Stickiness and Variable Effort

Wallers (1989) model which incorporates an effort augmented production function into a traditional Keynesian analysis of supply and demand shocks is generalised by not restricting the elasticity of substitution between effort and employment to be unity. This significantly changes the results in that unanticipated monetary shocks will affect output and indexing real wages will increase the variation of output in response to supply shocks. Involuntary unemployment is not necessary for demand shocks to affect employment and output in this model.