In this Paper, we analyse the implications of price setting restrictions for the conduct of cyclical fiscal and monetary policy. We consider an environment with monopolistic competitive firms, a shopping time technology, prices set one period in advance, and government expenditures that must be...

This paper investigates principally the effects of a technological innovation on hours worked in a sticky price model. Our challenge is to reproduce the short-run decline in employment supported by a large range of recent works, inspired by Gali (1999), regardless of any monetary policy...

We lay out a tractable model for fiscal and monetary policy analysis in a currency union, and analyse its implications for the optimal design of such policies. Monetary policy is conducted by a common central bank, which sets the interest rate for the union as a whole. Fiscal policy is...

We build a New Keynesian model of the business cycle with sticky prices and real wage rigidities motivated by efficiency wages of the gift exchange variety. Compared to a standard sticky price model, our Fair Wage model provides an explanation for structural employment and generates more...

This paper analyses the response of labor input to technology shocks in an estimated two-stage production framework with both price and wage stickiness and stage-specific shocks to productivity. Our model features a vertical input-output structure with imperfect mobility of labors across stages....

This Paper studies optimal fiscal and monetary policy under sticky product prices. The theoretical framework is a stochastic production economy without capital. The government finances an exogeneous stream of purchases by levying distortionary income taxes, printing money, and issuing one-period...

We analyse welfare-maximizing monetary policy in a dynamic general equilibrium two-country model with price stickiness and imperfect competition. In this context, a typical terms of trade externality affects policy interaction between independent monetary authorities. Unlike the existing...

Erceg et al. (2000) show that when both wages and prices are sticky, maximization of expected utility is equivalent to minimizing a loss function with three terms, involving measures of the variability of wage inflation, price inflation and the output gap respectively. Here we generalize their...

The existing literature on the stabilizing properties of interest-rate feedback rules has stressed the perils of linking interest rates to forecasts of future inflation. Such rules have been found to give rise to aggregate fluctuations due to self-fulfilling expectations. In response to this...

We lay out a small open economy version of the Calvo sticky price model, and show how the equilibrium dynamics can be reduced to a tractable canonical system in domestic inflation and the output gap. We employ this framework to analyse the macroeconomic implications of three alternative monetary...