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Economic Quarterly

Summer 1994

Short-Run Effects of Money When Some Prices Are Sticky

Lee E. Ohanian and Alan C. Stockman

The effects of monetary disturbances differ across sectors when some prices can adjust more rapidly than others. In a model economy with two sectors possessing different speeds of price adjustment, monetary shocks generate inverse movements of real interest rates, alter relative prices, and generate sectoral reallocations of labor. Factors such as the willingness of households to substitute goods across sectors and over time affect the economy's response.

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