Erceg, C. J. and Henderson, D. W. and Levin, A. T. (2000) Optimal monetary policy with staggered wage and price contracts. Journal of Monetary Economics, 46 (2). pp. 281-313.
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Abstract
We formulate an optimizing-agent model in which both labor and product markets exhibit monopolistic competition and staggered nominal contracts. The unconditional expectation of average household utility can be expressed in terms of the unconditional variances of the output gap, price inflation, and wage inflation. Monetary policy cannot achieve the Pareto-optimal equilibrium that would occur under completely flexible wages and prices; that is, the model exhibits a tradeoff in stabilizing the output gap, price inflation, and wage inflation. We characterize the optimal policy rule for reasonable calibrations of the model. We also "nd that strict price in#ation targeting generates relatively large welfare losses, whereas several other simple policy rules perform nearly as well as the optimal rule.
| Item Type: | Article |
|---|---|
| Uncontrolled Keywords: | Monetary policy; Inflation targeting; Nominal wage and price rigidity; Staggered contracts |
| Author Affiliation: | Federal Reserve Board, Mail Stop 24, 20th & C Streets NW, Washington, DC 20551, USA |
| Subjects: | Social Sciences |
| Divisions: | General |
| Depositing User: | Mr Siva Shankar |
| Date Deposited: | 07 Sep 2012 05:43 |
| Last Modified: | 07 Sep 2012 05:43 |
| Official URL: | http://dx.doi.org/10.1016/S0304-3932(00)00028-3 |
| URI: | http://eprints.icrisat.ac.in/id/eprint/7748 |
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