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2010 | OriginalPaper | Buchkapitel
Monetary Business Cycle Models (Sticky Prices and Wages)
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Since the earliest analysis of the monetary transmission mechanism by pre-eminent classical economists of the 18th and early 19th century, sticky prices and wages have been identified as playing a central role (Humphrey, 2004). The classical economists believed that prices adjusted gradually to a change in the nominal money stock, so that monetary changes could exert substantial short-run effects on output. Nominal wages were regarded as particularly slow to change, and thus helped account for gradual price adjustment by mitigating short-run pressures on factor costs.