A monetary model of factor utilisation

Working papers set out research in progress by our staff, with the aim of encouraging comments and debate.

Published on 18 April 2002

We investigate the propagation mechanism of monetary shocks in an otherwise standard sticky-price model, modified to incorporate factor hoarding in the form of variable capital utilisation rates and labour effort. In contrast to previous studies, we find that real effects of monetary shocks can be generated at relatively low degrees of nominal rigidity. Factor hoarding enriches the propagation mechanism by flattening the marginal cost responses to monetary shocks. The assumption of labour hoarding is crucial for generating persistence, while the assumption of variable capital utilisation allows us to generate realistic investment volatility without having to introduce capital adjustment costs.