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Stochastic Nominal Wage Contracts in a Cash-in-Advance Model

Published online by Cambridge University Press:  17 August 2016

Fabrice Collard  and
Guy Ertz
Fabrice Collard
Affiliation:
GREMAQ-CNRS, Toulouse
Guy Ertz
Affiliation:
Banque Générale du Luxembourg, Department of Economics, Université catholique de Louvain (UCL)
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Summary

The aim of this article is to assess the ability of Calvo (1983) type nominal wage contract to generate a positive and long-lasting hump-shaped response of output to a monetary stimulus, as suggested in empirical studies. To this end, we develop a simple cash-in-advance model, in which stochastic nominal wage contracts are introduced. This reduces the negative effect of the so-called inflation tax such that monetary shocks have a positive hump-shaped effect on output. The variance decomposition analysis suggests that monetary shocks explain up to 40% of the total variance of output in the first quarter and have a long lasting effect, in our calibrated economy (namely the German economy). Further, the model also mimics the correlation between output and inflation and real balances observed in Germany. We also propose an evaluation of the effects of variations in the mean duration of contracts on these indicators.

Résumé

Résumé

Nous nous proposons dans cet article d’évaluer la capacité de contrats de salaire de type Calvo (1983) de générer une fonction de réponse du produit à un choc monétaire tel que suggérée par les travaux empiriques existants. A cette fin, nous déveleppons un modèle d’équilibre général comme le modèle de cycle réel avec encaisses préalables dans lequel nous introduisons des contrats de salaires nominaux à durée aléatoires. Ce mé-chanisme réduit l’effet négatif de la taxe inflatoire et implique une réponse positive et durable du produit à un choc monétaire (effet en « cloche »). De plus, la décomposition de variance suggère qu’après le premier trimestre, près de 40% de la variance du produit est attribuable à la variance du choc monétaire (pour l’étalonnage basé sur l’économie allemande). De plus, le modèle parvient à répliquer les corrélations entre le produit et respectivement l’inflation et la monnaie en termes réel. Nous évaluons également les effets de changements de la durée moyenne des contrats.

Keywords

Business Cycle,Money,Persistence,Calvo Type Nominal Wage Contracts.E31,E32.E31,E32.
Type
Research Article
Information
Recherches Économiques de Louvain/ Louvain Economic Review , Volume 66 , Issue 3 , 2000 , pp. 281 - 301
Copyright
Copyright © Université catholique de Louvain, Institut de recherches économiques et sociales 2000 

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Footnotes

*

This text presents research results of the Belgian program on Interuniversity Poles of Attraction initiated by the Belgian State, Prime Minister’s Office, Science Policy Programming. We are thankful to G. Ascari, J-P. Benassy, P. Malgrange, F. Portier, H. Sneessens, all the participant to the T2M conference in Louvain-la-Neuve (May 1997) for their comments on earlier drafts, and to P. Brandner and K. Neusser for providing German data. We are also indebted to three anonymous referees for their valuable comments. The traditional disclaimer applies.

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