New Micro-foundations for Macroeconomics
"Monetary Business Cycle Accounting"
Roman Sustek (Bank of England) Saturday 11 July, 14.00 - 14.45
Abstract
This paper investigates the quantitative importance of various types of frictions for inflation and nominal interest rate dynamics by extending business cycle accounting to monetary
models. Representing a variety of real and nominal frictions as `wedges' to standard equilibrium conditions allows a quantitative assessment of those frictions. Decomposing the
data into movements due to these wedges shows that frictions that are equivalent to wedges
in TFP and equilibrium conditions for asset markets are essential. In contrast, wedges in
equilibrium conditions for capital accumulation and the resource constraint, and wedges
capturing distortionary effects of sticky prices, play only a secondary role.