Question

In Laurence Meyer’s “Monetarism Without Money” model, there are “backward-looking” elements in his equations (1) and (2) so that last period’s level of the output gap and last period’s rate of inflation affect this period’s output gap and inflation rate. This is to capture the role of sticky wages and prices in the short run. Here he must really be talking about sticky rates of change of wages and prices. How does this allow a role for monetary policy, and how does monetary policy work in his model? We ought to be able to apply the New Keynesian explanations of sticky wages and prices to explain the existence of “backward-looking” influences. How do the New Keynesians argue that explicit and implicit contracts and efficiency wages slow down changes in money and real wages? Why did John Maynard Keynes say, though, that sticky wages and prices are not necessary to explain unemployment?

Answer 1

The model includes an aggregate demand equation a philliple curve, and a monetary policy rule. The aggregate demand equation, given by equation 1, is essentially a dynamic version of the old is curve, In which the level of out put/ in the case the out but gap) depends on the real Interest rate. This specification allows for effect of both logged output and expectations about future out put. The Phillips curve, given by equation 2, relates the Inflation rate to the out put gap \r\n (measuring) the balance between supply and demand in the out put market) and to both past Inflation and Inflation expectation. The effect of past Inflation captures the role of sticky prices. while Inflation expectations are assumed to be set, as In equation 1, according to rational expectations. The policy rule, equation 3, relates the Interest rate, viewed as the Instrument of monetary policy, to the