22
PEDRO PABLO ALVAREZ LOIS
Despite the one-time nature of the shock, the growth rate of money will stay above
trend for several quarters given that the autocorrelation coefficient is px = 0.32.
The impulse responses of the two parameterized models described in the previous
section are compared. In this manner, it is possible to analyze the quantitative
importance of the capacity utilization constraints as a source of asymmetry in the
dynamics of the economy.
A number of results are worth noting here. First, both versions of the model
are able to reproduce the stylized facts of monetary policy. According to many
studies in the identified VAR literature, an expansive money supply shock leads to
an increase of employment, aggregate output and real wages and to a decrease of
nominal interest rates. A liquidity effect is found in the model in that the monetary
shock leads to a decrease in nominal interest rates and an increase in capital and
labor. The capital∕labor ratio also increases after the shock, thus, the maximum
level of employment available in the period after the shock decreases, and likewise
the maximum volume of sales of input firms. This negative effect is compensated
by an increase in firms’ labor productivity, something that has a favorable effect
on their competitive position in case of excess capacities. The liquidity effect also
causes output to rise immediately. Employment and investment respond to the
policy shock much like output. Another important feature of the result is that
real wages rise after a positive money shock. The real wage rate exerts upward
pressure on the marginal cost of hiring labor, which had declined in the impact
period because of the lower interest rates. Lower production costs push input
prices downwards leading to an increase in input demands and inducing to a more
extensive use of productive capacities in all the firms with idle productive resources.
Reflecting the dynamics of output, prices initially rise and later decrease to slowly
return to its non-stochastic steady state value.15 The mark-up and the capacity
utilization rates increase, whereas the weighted proportion of firms underusing their
resources falls. The dynamics of these variables, in particular the increase in mark-
ups induced by the higher capacity utilization, will partially offset the reduction
in input prices. Consequently, the magnitude of the response of variables such
as prices, output an employment, will depend crucially on the magnitude of the
response of the mark-up. Recall that the response of this variable is closely related
to the proportion of firms producing at full capacity. When capacity is high, the
spill-over effect described above is high and thus is the market power and mark-
up. Consequently, in situations of high capacity, and implied high mark-up’s, the
liquidity effect is to some extent compensated by a capacity effect. This is the source
of asymmetry that is found in the responses of the main macroeconomic variables
of this model.
The important result of this exercise is that the responses of the endogenous
variables to the monetary shock depend crucially on the extent to which real re-
sources are used. Panel (a) of Figures 1 to 10 show the impulse responses to an
unanticipated shock happening in the third quarter, whereas Panel (b) shows the
impact effect of the same shock for a level of capacity utilization rate ranging, at the
15In this version of the model, the dynamic response functions of the endogenous variables
lack persistence. For instance, output and employment do not display the delayed hump shape
response that the estimated response functions exhibit as reported in Chirstiano et al. (1998).