We would like to thank (without implicating) Gary Anderson, Harris Dellas, Martin Eichenbaum, Luca Guerrieri, Christopher Gust, Dale Henderson, Peter Ireland, Michel Juillard, Jinill Kim, Eric Leeper, Andrew Levin, David Lopez-Salido, Eric Swanson, and Martin Uribe for helpful discussions. We also thank seminar participants at Bonn University, Boston College, the European Monetary Forum, the European Central Bank, the Bank of England, and the Federal Reserve Board. Two anonymous referees and the editor made helpful comments on an earlier draft.
The Cost of Nominal Rigidity in NNS Models
Article first published online: 13 SEP 2007
Journal of Money, Credit and Banking
Volume 39, Issue 7, pages 1563–1586, October 2007
How to Cite
CANZONERI, M. B., CUMBY, R. E. and DIBA, B. T. (2007), The Cost of Nominal Rigidity in NNS Models. Journal of Money, Credit and Banking, 39: 1563–1586. doi: 10.1111/j.1538-4616.2007.00079.x
- Issue published online: 13 SEP 2007
- Article first published online: 13 SEP 2007
- Received May 23, 2005; and accepted in revised form October 30, 2006.
- cost of nominal rigidity
We present a model with Calvo wage and price setting, capital formation, and estimated rules for government spending and monetary policy. Our model captures many aspects of U.S. data, including the volatility that has been observed in various efficiency gaps. We estimate the cost of nominal rigidity—welfare under flexible wages and prices minus welfare with nominal rigidities—to be as much as 3% of consumption each period. Since there are interest rate rules that virtually eliminate this cost, our model suggests that—contrary to Lucas's (2003) assertion—there is considerable room for improvement in demand management policy.