The Role of Contracting Schemes for the Welfare Costs of Nominal Rigidities over the Business Cycle,” unpublished

What is the role of contracting schemes for the welfare costs of nominal rigidi-ties over the business cycle? We examine 5 different modeling schemes of nominal rigidities that all have the same average duration of contracts. We find that Calvo (1983) wage and price contracts may deliver welfare costs that are 3-4 times higher than Taylor (1980) contracts. However, that result is sensitive to the monetary policy rule. It does not hold generally, that Calvo (1983) contracts yields higher welfare cost than Taylor (1980) or Wolman (1999) contracts. The sticky information scheme of Mankiw and Reis (2002) is shown to deliver welfare costs of nominal rigidities that are smallest of all schemes and typically smaller than 0.07 of period consump-tion, the Lucas (2003) cost of consumption variability. We discuss the implications of modeling capital mobility. We show further that our key results also hold in the more complex model of Canzoneri, Cumby, and Diba (2004) which has better em-pirical support