This paper explores the dynamic effects of a monetary policy shock on inflation and output, using a model that incorporates moderate nominal rigidities. The key features of the model include staggered wage contracts with an average duration of three quarters and variable capital utilization. The authors estimate the model to match the observed inertia in inflation and persistence in output, finding that wage contracts, not price contracts, are the critical nominal friction. The model successfully reproduces the delayed, hump-shaped response in consumption, investment, profits, productivity, and the weak response of the real wage. The model also demonstrates strong internal propagation mechanisms, with the effects of a monetary policy shock persisting beyond the initial interest rate and money growth rate changes. The authors use a limited information econometric strategy to estimate and evaluate the model, comparing projections in the model and data. The results suggest that the model can account for the observed dynamics of the US economy following a monetary policy shock.This paper explores the dynamic effects of a monetary policy shock on inflation and output, using a model that incorporates moderate nominal rigidities. The key features of the model include staggered wage contracts with an average duration of three quarters and variable capital utilization. The authors estimate the model to match the observed inertia in inflation and persistence in output, finding that wage contracts, not price contracts, are the critical nominal friction. The model successfully reproduces the delayed, hump-shaped response in consumption, investment, profits, productivity, and the weak response of the real wage. The model also demonstrates strong internal propagation mechanisms, with the effects of a monetary policy shock persisting beyond the initial interest rate and money growth rate changes. The authors use a limited information econometric strategy to estimate and evaluate the model, comparing projections in the model and data. The results suggest that the model can account for the observed dynamics of the US economy following a monetary policy shock.