Nominal shocks lead to persistent real effects on economy and employment.
This paper looks at how changes in government spending or exchange rates affect different parts of the economy. By using a model of a small open economy with slow investment and a preference for holding money, the researchers found that when there is a big increase in spending, prices go up, leading to changes in wages, capital, and employment. This can boost domestic income but also create a trade deficit. The effects of these changes can last for a while before balancing out.