Sticky Prices versus Monetary Frictions: An Estimation of Policy Trade-Offs

S. Boragan Aruoba and Frank Schorfheide

American Economic Journal: Macroeconomics, 2011, vol. 3, issue 1, 60-90

Abstract: We develop a two-sector monetary model with a centralized and decentralized market. Activities in the centralized market resemble those in a standard New Keynesian economy with price rigidities. In the decentralized market agents engage in bilateral exchanges for which money is essential. This paper is the first to formally estimate such a model, evaluate its fit based on postwar US data, and assess its money demand properties. Steady-state welfare calculations reveal that the distortions created by the monetary friction may be of similar magnitude as the distortions created by the New Keynesian friction. (JEL C54, E12, E31, E41, E52)

JEL-codes: C54 E12 E31 E41 E52 (search for similar items in EconPapers)
Date: 2011
Note: DOI: 10.1257/mac.3.1.60
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Citations: View citations in EconPapers (90)

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Related works:
Working Paper: Sticky prices versus monetary frictions: an estimation of policy trade-offs (2009)
Working Paper: Sticky Prices Versus Monetary Frictions: An Estimation of Policy Trade-offs (2009)
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