Christiano, Eichenbaum, and Evans
Mark Thoma notes the very nice Christiano, Eichenbaum, and Evans paper in the February Journal of Political Economy:
Economist's View: The Dynamic Adjustment to Monetary Shocks: A paper in the February 2005 issue of the Journal of Political Economy by Lawrence J. Christiano and Martin Eichenbaum of Northwestern University, the NBER, and Federal Reserve Bank of Chicago, and Charles L. Evans of the Federal Reserve Bank of Chicago entitled "Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy" provides evidence on this issue:
Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy, JPE: This paper seeks to understand the observed inertial behavior of inflation and persistence in aggregate quantities. To this end, we formulate and estimate a dynamic, general equilibrium model that incorporates staggered wage and price contracts. The model does a very good job of accounting quantitatively for the estimated response of the U.S. economy to a policy shock. Specifically, the model generates an inertial response in inflation and a persistent, hump-shaped response in output after a policy shock. In addition, the model generates hump-shaped responses in investment, consumption, employment, profits, and productivity, as well as a small response in the real wage. Also, the interest rate and the money growth rate move persistently in opposite directions after a monetary policy shock. A key finding of the analysis is that stickiness in nominal wages is crucial for the model's performance. Stickiness in prices plays a relatively small role.
The only problem I find with the paper--and it's not one that one can fix at all easily or well--is that it is not completely clear what a "monetary shock" really is.
