In a sticky-price model with labor market search and habit persistence, Walsh (2005) shows that inertia in the interest rate policy helps to reconcile the inflation and output persistence with empirical observations for the US economy. We show that this finding is sensitive with regard to the...

The paper analyzes the dynamic effects of a total factor productivity shock and an interest rate risk premium shock in a highly indebted open economy. In contrast to the standard open economy framework, search unemployment and wage bargaining are introduced. We find that a negative total factor...