In this paper, we measure the welfare costs/gains associated with financial market incompleteness in a monetary union. To do this, we build on a two-country model of a monetary union with sticky prices subject to asymmetric productivity shocks. For most plausible values of price stickiness, we show that asymmetric shocks under incomplete financial markets give rise to a lower volatility of nati...

This paper analyzes the effects of pegged and floating exchange rates using a two-country dynamic general equilibrium model that is calibrated to the US and a European aggregate. The model assumes shocks to money, productivity and the interest rate parity condition. It captures the fact that the sharp increase in nominal exchange rate volatility after the end of the Bretton Woods (BW) system wa...

How does an unexpected domestic monetary expansion affect the foreign economy? Does it induce an increase or a decline in foreign production? In the traditional two-country Mundell-Fleming model, monetary policy has «beggar-thy-neighbor» effects. Yet, empirical evidence from VARs indicates that U.S. monetary policy has positive international transmission effects on both foreign (non-U.S. G-7) o...

Following a recession, the aggregate labor market is slack–employment remains below normal and recruiting efforts of employers, as measured by help-wanted advertising and vacancies, are low. A model of matching friction explains the qualitative responses of the labor market to adverse shocks, but requires implausibly large shocks to account for the magnitude of observed fluctuations. The incorp...

We develop a multi-sector sticky-price DSGE model that can endogenously deliver differential responses of prices to aggregate and sectoral shocks. Input-output production linkages induce across-sector pricing complementarities that contribute to a slow response of prices to aggregate shocks. In turn, labor-market segmentation at the sectoral level induces within-sector pricing substitutability,...

Sticky-price models often suggest that relative price distortion is a major cost of in‡ation. We provide an intuition for this: Even at low rates, in‡ation strongly a¤ects price dispersion which in turn has an impact on the economy qualitatively similar to, and of the order of magnitude of, a negative shift in productivity. The utility cost of price dispersion is quanti…ed and its impact on opt...

This paper shows that switching the dominant use of household-specific sticky wages in the New Keynesian model (Erceg, Henderson, and Levin 2000) for firm-specific sticky wages has qualitative and quantitative consequences. First, the model with firm-specific sticky wages incorporates endogenous changes in the rate of unemployment, whereas there is no unemployment with household-specific sticky...

A wrong model can lead to a wrong conclusion. The failure to capture inflation dynamics has made the standard New Keynesian framework of monetary policy analysis prone to such a critique. In this paper, we investigate optimal monetary policy using a model that can capture the observed inflation persistence. The model, which we call the dual stickiness model, integrates sticky prices and sticky ...

To generate big responses of unemployment to productivity shocks in a business cycle context or to productivity changes in a welfare state context, researchers have reconfigured matching models in various ways, e.g., by elevating the utility of leisure, by making wages sticky, by assuming alternating-offer wage bargaining, by introducing fixed matching costs, and the costly acquisition of credi...

This paper analyzes a two-country general equilibrium model with multiple stages of production and sticky prices. Working through the cross-country input-output relations and endogenous price stickiness, the model generates the observed patterns in international aggregate comovements following monetary shocks. In particular, both output and consumption comove across countries, and output correl...