Monetary Economics.

• Position: Bureau News

Members and guests of the NBER's Program on Monetary Economics met in Cambridge on November 2. Ben S. Bernanke, NBER and Princeton University, organized this program:

Lawrence J. Christiano and Martin Eichenbaum, NBER and Northwestern University, and Charles L. Evans, Federal Reserve Bank of Chicago, "Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy" (NBER Working Paper No. 8403)

Discussant: Alan Stockman, NBER and University of Rochester

Michael Dotsey, Federal Reserve Bank of Richmond, and Robert G. King, NBER and Boston University, "Pricing, Production, and Persistence" (NBER Working Paper No. 8407)

Discussant: Julio J. Rotemberg, NBER and Harvard University

Yacine Ait-Sahalia and Jonathan A. Parker, NBER and Princeton University, and Motohiro Yogo, Harvard University, "Luxury Goods and the Equity Premium" (NBER Working Paper No. 8417)

Discussant: Annette Vissing-Jorgensen, NBER and University of Chicago

Jordi Gali, NBER and Universitat Pompeu Fabra; Mark Gertler, NBER and New York University; and J. David Lopez-Salido, Bank of Spain, "Markups, Gaps, and the Welfare Costs of Business Fluctuations"

Discussant: Susanto Basu, NBER and University of Michigan

Ricardo J. Cabaliero, NBER and MIT, and Arvind Krishnamurthy, Northwestern University, "A 'Vertical' Analysis of Crises and Central Bank Intervention" (NBER Working Paper No. 8428)

Discussant: Andres Velasco, NBER and Harvard University

Christopher L. House, NBER and Boston University, "Adverse Selection and the Accelerator"

Discussant: Jeremy Stein, NBER and Harvard University

Christiano, Eichenbaum, and Evans present a model embodying moderate amounts of nominal rigidities that explains the observed inertia in inflation and persistence in output. The key features of the model prevent a sharp rise in marginal costs after an expansionary shock to monetary policy. Of these features, the most important are staggered wage contracts averaging three quarters in duration and variable capital utilization.

Using a small macroeconomic model and a larger fully articulated model, Dotsey and King show how a particular view of real marginal cost can lead to substantial persistence. This view is based on three features of the "supply side" of the economy that the authors believe are realistic: an important role for produced inputs; variable capacity utilization; and labor supply variability through changes in employment. Importantly, these "real flexibilities" work together to...