This paper extends the standard New Keynesian model by incorporating labor adjustment costs and overtime work. I show that labor frictions help reconcile the frequent price changes found in the microdata with the degree of sluggishness in inflation adjustment to output changes at the macro level. The introduction of labor frictions affects the dynamic behavior of economic variables (particularl...

We study identiÞcation in a class of three-equation monetary models. We argue that these models are typically not identiÞed. For any given exactly identiÞed model, we provide an algorithm that generates a class of equivalent models that have the same reduced form. We use our algorithm to provide four examples of the consequences of lack of identiÞcation. In our Þrst two examples we show that it...

Phillips curves are central to discussions of inflation dynamics and monetary policy. New Keynesian Phillips curves describe how past inflation, expected future inflation, and a measure of real marginal cost or an output gap drive the current inflation rate. This paper studies the (potential) weak identification of these curves under generalized methods of moments (GMM) and traces this syndrome...

I n most industrialized economies inflation tends to be pro-cyclical; that is, inflation is high during times of high economic activity. When economic activity is measured by the unemployment rate this statistical relationship is known as the Phillips curve. The Phillips curve is sometimes viewed as a menu for monetary policymakers, that is, they can choose between high inflation and low unempl...

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Price rigidity is the key mechanism for propagating business cycles in traditional Keynesian theory. Yet the New Keynesian literature has failed to show that sticky prices by themselves can e¤ectively propagate business cycles in general equilibrium. We show that price rigidity in fact can (by itself) give rise to a strong propagation mechanism of the business cycle in standard New Keynesian mo...