Economics Commons^™

The Real Effects Of Money Growth In Dynamic General Equilibrium, Liam Graham, Dennis Snower

Dennis Snower

Dynamic New Keynesian models generally ignore steady state money growth. Within a standard New Keynesian framework, we show that the interaction between staggered nominal contracts and money growth leads to a long-run trade-off between output and money growth that is significant, and remains so when the contract length is endogenised. We show that the existence of the tradeoff depends crucially on a phenomenon we call employment cycling: firms’ substitution among different labor types over the course of the contract period. We discuss the plausibility of this phenomenon and show that when it is absent, money becomes super-neutral.