Abstract

VAR analysis of monetary shocks suggest that an unanticipated, positive money shocks cause a drop in nominal interest rates, and increases in output, consumption, prices, and wages. Further, impulse responses indicate a "hump shaped" pattern with the maximum effect felt 1-2 years after the initial shock. Limited participation models can replicate the contemporaneous correlations of money shocks, but have difficulty with the longer run dynamics. This paper integrates a limited participation framework in a vintage capital model in an attempt to strengthen the monetary transmission mechanism.

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