Generating real persistent effects of monetary shocks: How much nominal rigidity do we really need?

This paper attempts to assess whether money can generate persistent economic fluctuations in dynamic general equilibrium models of the business cycle. We show that a small nominal friction in the goods market can make the response of output to monetary shocks large and persistent if it is amplified by real-wage rigidity in the labor market. We also argue that for plausible levels of real-wage rigidity, a small degree of nominal stickiness is sufficient for money to produce economic fluctuations as persistent as those observed in the data. (C) 1998 Published by Elsevier Science B.V. All rights reserved.