<blockquote>
<p>Does it come from the fact that prices are rigid in DSGE models? Or that there is imperfect competition?</p>
</blockquote>
<p>The result that monetary policy can affect real variables itself is due to price stickiness, but the price stickiness in labor markets is caused by market imperfections. Furthermore, assumption on imperfect competition in goods market and thus allowing firms to earn markup also has a role as well but in principle you can have DSGE models with just wage stickiness and labor market imperfections and have NK DSGE model. NK DSGE is not a single model it’s a family of models.</p>
<blockquote>
<p>Without price rigidity or imperfect competition (that is to say having an RCB model rather than a DSGE model), would it mean that any monetary policy shock (or any demand shock) would only cause inflation?</p>
</blockquote>
<ol>
<li>In canonical RBC models monetary policy would only change price level. However, there exist some RBC models where the money is non neutral.</li>
<li>RBC is not opposite of DSGE. DSGE stands for dynamic stochastic general equilibrium model. Both RBC and NK models can be DSGE models. With perfect markets you would have RBC DSGE model. RBC is in fact an example of one of the earliest DSGE models (see <a href="https://faculty.wcas.northwestern.edu/yona/research/DSGE.pdf" rel="nofollow noreferrer">Christiano et al 2017</a>).</li>
</ol>

CC BY-SA 4.0
2022-04-13T16:52:25.560Z
Seems like you are saying monetary policies do not affect real variables in RBC models? I don’t think that is true. Both Sidrauski and Clower type models allow for non-superneutral behavior.
erik
CC BY-SA 4.0
2022-04-13T16:59:52.747Z
@erik hi thanks for pointing that out I edited my answer
1muflon1
CC BY-SA 4.0
2022-04-14T08:24:21.193Z
As pointed out by Arrow (1959), you cannot have price stickiness matter with competitive markets (unless you include other frictions like information frictions). If you were to set your price too low you would go bankrupt due to selling below costs, if you set it too high, nobody would buy from you. Thus, a firm not selecting the competitive price that other producers choose would be driven out of the market. It is the combination of stickiness and non-competitiveness that matters. The same would hold true for wage stickiness. Labor markets need to be non-competitive as well.
jpfeifer
CC BY-SA 4.0
2022-04-14T08:32:49.290Z
@jpfeifer but I clearly mention in my answer the wage stickiness is caused by imperfect labor markets. I am saying you don’t need imperfect competition **in goods market** because having wage stickiness (cased by labor market imperfections) in itself is enough
1muflon1
CC BY-SA 4.0
2022-04-14T08:41:04.140Z
Those are two different things. You could have wage stickiness, but with competitive labor markets it would not matter at all. We don't care about the causes for stickiness, we typically assume it (e.g. there are contracts or a Calvo fairy). But we need to assume imperfect competition as well. It is not implied by stickiness and also does not cause the latter.
jpfeifer
CC BY-SA 4.0
2022-04-14T09:03:49.913Z
@jpfeifer yes but we do not have to assume imperfect competition on goods market, having imperfections in labor market is enough as mentioned in my answer
1muflon1
CC BY-SA 4.0
2022-04-14T09:20:42.827Z
@1muflon1 I am saying the both parts of "The result that monetary policy can affect real variables itself is due to price stickiness, but the price stickiness in labor markets is caused by market imperfections. " are misleading/imprecise due to one either needing both sticky prices and imperfect competition in product markets or both sticky wages and imperfect competition in labor markets. For the last part, imperfections is too vague and not the cause for wage stickiness.
jpfeifer
CC BY-SA 4.0
2022-04-14T09:32:38.453Z
@jpfeifer 1. I clarified the part of labor market imperfections. 2. But in standard NK models wage rigidity is caused by hiring frictions - these hiring frictions are market imperfections as far as I understand
1muflon1
CC BY-SA 4.0
2022-04-14T10:59:10.570Z
The standard frameworks like Erceg/Henderson/Levine or Schmitt-Grohe/Uribe have differentiated labor services that are not perfect substitutes.
jpfeifer
CC BY-SA 4.0
2022-04-13T16:21:33.683Z
2022-04-14T09:30:53.170Z
2022-04-14T09:30:53.170Z
1muflon1
<p>In the article The State of New Keynesian Economics: A Partial Assessment, Gali says the following about the monetary policy in DSGE models: &quot;Exogenous changes in monetary policy have nontrivial effects on real variables, not only on nominal ones.&quot;</p>
<p>I have 2 quesitons:</p>
<ol>
<li><p>Does it come from the fact that prices are rigid in DSGE models? Or that there is imperfect competition?</p>
</li>
<li><p>Without price rigidity or imperfect competition (that is to say having an RCB model rather than a DSGE model), would it mean that any monetary policy shock (or any demand shock) would only cause inflation?</p>
</li>
</ol>

<macroeconomics><monetary-policy><price><dsge><real-business-cycles>
Real effect of monetary policy
BAL
# Real effect of monetary policy

(Asked by: username_0 on 2022-04-13)

In the article The State of New Keynesian Economics: A Partial Assessment, Gali says the following about the monetary policy in DSGE models: "Exogenous changes in monetary policy have nontrivial effects on real variables, not only on nominal ones."

I have 2 quesitons:

1. Does it come from the fact that prices are rigid in DSGE models? Or that there is imperfect competition?
2. Without price rigidity or imperfect competition (that is to say having an RCB model rather than a DSGE model), would it mean that any monetary policy shock (or any demand shock) would only cause inflation?

**Tags:** macroeconomics, monetary-policy, price, dsge, real-business-cycles


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## 1 answers

### Answer by username_1 on 2022-04-13. Score: 2

> Does it come from the fact that prices are rigid in DSGE models? Or that there is imperfect competition?

The result that monetary policy can affect real variables itself is due to price stickiness, but the price stickiness in labor markets is caused by market imperfections. Furthermore, assumption on imperfect competition in goods market and thus allowing firms to earn markup also has a role as well but in principle you can have DSGE models with just wage stickiness and labor market imperfections and have NK DSGE model. NK DSGE is not a single model it’s a family of models.

> Without price rigidity or imperfect competition (that is to say having an RCB model rather than a DSGE model), would it mean that any monetary policy shock (or any demand shock) would only cause inflation?

1. In canonical RBC models monetary policy would only change price level. However, there exist some RBC models where the money is non neutral.
2. RBC is not opposite of DSGE. DSGE stands for dynamic stochastic general equilibrium model. Both RBC and NK models can be DSGE models. With perfect markets you would have RBC DSGE model. RBC is in fact an example of one of the earliest DSGE models (see [Christiano et al 2017](https://faculty.wcas.northwestern.edu/yona/research/DSGE.pdf)).

> **Comments:**
> **username_2**: Seems like you are saying monetary policies do not affect real variables in RBC models? I don’t think that is true. Both Sidrauski and Clower type models allow for non-superneutral behavior.  
> **username_1**: @username_2 hi thanks for pointing that out I edited my answer  
> **username_3**: As pointed out by Arrow (1959), you cannot have price stickiness matter with competitive markets (unless you include other frictions like information frictions). If you were to set your price too low you would go bankrupt due to selling below costs, if you set it too high, nobody would buy from you. Thus, a firm not selecting the competitive price that other producers choose would be driven out of the market. It is the combination of stickiness and non-competitiveness that matters. The same would hold true for wage stickiness. Labor markets need to be non-competitive as well.  
> **username_1**: @username_3 but I clearly mention in my answer the wage stickiness is caused by imperfect labor markets. I am saying you don’t need imperfect competition **in goods market** because having wage stickiness (cased by labor market imperfections) in itself is enough  
> **username_3**: Those are two different things. You could have wage stickiness, but with competitive labor markets it would not matter at all. We don't care about the causes for stickiness, we typically assume it (e.g. there are contracts or a Calvo fairy). But we need to assume imperfect competition as well. It is not implied by stickiness and also does not cause the latter.  
> **username_1**: @username_3 yes but we do not have to assume imperfect competition on goods market, having imperfections in labor market is enough as mentioned in my answer  
> **username_3**: @username_1 I am saying the both parts of "The result that monetary policy can affect real variables itself is due to price stickiness, but the price stickiness in labor markets is caused by market imperfections. " are misleading/imprecise due to one either needing both sticky prices and imperfect competition in product markets or both sticky wages and imperfect competition in labor markets. For the last part, imperfections is too vague and not the cause for wage stickiness.  
> **username_1**: @username_3 1. I clarified the part of labor market imperfections. 2. But in standard NK models wage rigidity is caused by hiring frictions - these hiring frictions are market imperfections as far as I understand  
> **username_3**: The standard frameworks like Erceg/Henderson/Levine or Schmitt-Grohe/Uribe have differentiated labor services that are not perfect substitutes.  

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