On Stickiness, Cash in Advance, and Persistence

Abstract

This paper shows that a model which combines sticky price and sticky wages with investment in the cash-in-advance constraint generates business cycle dynamics consistent with empirical evidence. The model reproduces the responses of the key macroeconomic variables to technology and money supply shocks. In particular, the model generates enough output and inflation persistence with standard stickiness parameters. This setup is also able to generate the liquidity effect after a money injection, overcoming other standard new Keynesian models.sticky prices; sticky wages; monetary facts; labor market facts; cash-in-advance