Central to the Keynesian interpretation of economic fluctuations is the notion that prices and wages are rigid or "sticky," so that movements in aggregate demand, rather than being quickly reflected in price level movements, have instead long-lasting effects on output and economic activity. The...

A key argument in Caplin and Leahy (1997) states that the correlation between monetary shocks and output is falling in the variance of the money supply. We demonstrate that this conclusion depends on solving for the correlation in the non-stationary state of the model. In the stationary state,...