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This paper proposes a New Keynesian Dynamic Stochastic General Equilibrium (DSGE) model where real money balances enter the production function. By using a Bayesian analysis, our model shows that money is not an omitted input to the production process and rejects the decreasing returns to scale hypothesis.

Why do some sellers set nominal prices that apparently do not respond to changes in
the aggregate price level? In many models, prices are sticky by assumption; here it
is a result. We use search theory, with two consequences: prices are set in dollars,
since money is the medium of exchange; and equilibrium implies a nondegenerate

Is money's role relevant to describing the post-WWII U.S. macroeconomic dynamics? Has this relevance changed over time? These questions are answered using both fixed-coefficient and rolling-window Bayesian estimations of a structural model of the business cycle with money.

Psychological factors, market sentiments, and shifts in beliefs are believed by many to play a nontrivial role in inducing and amplifying economic fluctuations. Yet, these forces are rarely considered in macroeconomic models. This paper provides an attempt to evaluate the empirical role of expectational shocks on business cycle fluctuations.

We propose a new procedure to increase the power of panel unit root tests when used to study

We estimate the approximate nonlinear solution of a small DSGE model on euro area data, using the conditional particle filter to compute the model likelihood. Our results are consistent with previous findings, based on simulated data, suggesting that this approach delivers sharper inference compared to the estimation of the linearised model.

This article is related to the large recent literature on Phillips curves in sticky- price equilibrium models. It differs in allowing for the degree of price stickiness to be determined endogenously. A closed-form solution for short-term inflation is derived from the dynamic stochastic general equilibrium (DSGE) model with state-dependent pricing developed by Dotsey, King and Wolman.

Recent contributions have suggested that technology shocks have a negative impact on hours, contrary to the prediction of standard flexible-price models of the business cycle. Some authors have interpreted this finding as evidence in favour of sticky-price models, while others have either extended flexible-price models or disputed the empirical finding itself.