The New Palgrave Dictionary of Economics

2018 Edition
| Editors: Macmillan Publishers Ltd

Monetary Business Cycle Models (Sticky Prices and Wages)

  • Christopher J. Erceg
Reference work entry


Monetary business cycle (MBC) models are general equilibrium models designed to analyse how monetary shocks affect output, prices, and interest rates. This article describes the analytic framework underlying sticky prices and wages in modern MBC models, and highlights the prominent role that these rigidities play in the transmission of nominal and real shocks.


Cost-push inflation Friedman, M Inflation Inflationary expectations Intertemporal optimization Keynes, J. M Lucas, R Microfoundations Monetary business cycle models Monetary policy rules Monetary shocks Monetary transmission mechanism New Keynesian Phillips curve Nominal rigidities Nominal shocks Nominal wage inflation Output gap Phelps, E Phillips curve Price dynamics Rational expectations Real business cycles Real rigidities Real shocks Staggered contracts model Sticky prices Sticky wages Technology shocks Unemployment 

JEL Classification

D4 D10 
This is a preview of subscription content, log in to check access.


  1. Bils, M., and P. Klenow. 2004. Some evidence on the importance of sticky prices. Journal of Political Economy 112: 947–985.CrossRefGoogle Scholar
  2. Blanchard, O. 2000. What do we know about macroeconomics that Fisher and Wicksell did not? Quarterly Journal of Economics 115: 1375–1409.CrossRefGoogle Scholar
  3. Calvo, G. 1983. Staggered prices in a utility-maximizing framework. Journal of Monetary Economics 12: 383–398.CrossRefGoogle Scholar
  4. Christiano, L., M. Eichenbaum, and C. Evans. 2005. Nominal rigidities and the dynamic effects of shocks to monetary policy. Journal of Political Economy 113: 1–45.CrossRefGoogle Scholar
  5. Clarida, R., J. Gali, and M. Gertler. 1999. The science of monetary policy: A new Keynesian perspective. Journal of Economic Literature 37: 1661–1707.CrossRefGoogle Scholar
  6. Erceg, C., D. Henderson, and A. Levin. 2000. Optimal monetary policy with staggered wage and price contracts. Journal of Monetary Economics 46: 281–313.CrossRefGoogle Scholar
  7. Fisher, I. 1920. Stabilizing the dollar. Norwood, MA: Norwood Press.Google Scholar
  8. Friedman, M. 1968. The role of monetary policy. American Economic Review 58(1): 1–17.Google Scholar
  9. Gali, J. 1999. Technology, employment, and the business cycle: Do technology shocks explain aggregate fluctuations? American Economic Review 89: 249–271.CrossRefGoogle Scholar
  10. Humphrey, T. 2004. Classical deflation theory. Federal Bank of Richmond Economic Quarterly 90: 11–32.Google Scholar
  11. Keynes, J. 1936. The general theory of interest, employment, and money. London: Macmillan.Google Scholar
  12. Lucas, R. 1972. Expectations and the neutrality of money. Journal of Economic Theory 4: 103–124.CrossRefGoogle Scholar
  13. Phelps, E. 1968. Money–wage dynamics and labor market equilibrium. Journal of Political Economy 76: 678–711.CrossRefGoogle Scholar
  14. Sargent, T., and N. Wallace. 1975. Rational expectations, the optimal monetary instrument, and the optimal money supply rule. Journal of Political Economy 83: 169–183.CrossRefGoogle Scholar
  15. Taylor, J. 1999. Staggered wage and price setting in macroeconomics. In Handbook of macroeconomics, ed. J.B. Taylor and M. Woodford. Amsterdam: North-Holland.Google Scholar
  16. Woodford, M. 2003. Interest and prices. Princeton: Princeton University Press.Google Scholar
  17. Yun, T. 1996. Nominal price rigidity, money supply endogeneity, and business cycles. Journal of Monetary Economics 37: 345–370.CrossRefGoogle Scholar

Copyright information

© Macmillan Publishers Ltd. 2018

Authors and Affiliations

  • Christopher J. Erceg
    • 1
  1. 1.