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Optimal Monetary Policy with Staggered Wage and Price Contracts
TLDR
In this article, the unconditional expectation of average household utility is expressed in terms of the unconditional variances of the output gap, price inflation, and wage inflation, where the model exhibits a tradeoff between stabilizing output gap and price inflation.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 replicate the Pareto-optimal equilibrium that would occur under completely flexible wages and prices; that is, the model exhibits a tradeoff between stabilizing the output gap, price inflation, and wage inflation. The Pareto optimum is attainable only if either wages or prices are completely flexible. For reasonable calibrations of the model, we characterize the optimal policy rule. Furthermore, strict price inflation targeting is clearly suboptimal, whereas rules that also respond to either the output gap or wage inflation are nearly optimal.read more
Citations
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Macroeconomic Effects of Nominal Exchange Rate Regimes: New Insights into the Role of Price Dynamics
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References
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Staggered prices in a utility-maximizing framework
TL;DR: In this article, the authors developed a model of staggered prices along the lines of Phelps (1978) and Taylor (1979, 1980), but utilizing an analytically more tractable price-setting technology.
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Discretion versus policy rules in practice
TL;DR: In this article, the authors examine how recent econometric policy evaluation research on monetary policy rules can be applied in a practical policymaking environment, and the discussion centers around a hypothetical but representative policy rule much like that advocated in recent research.
Journal ArticleDOI
The solution of linear difference models under rational expectations
TL;DR: In this article, an explicit solution for an important subclass of the model Shiller refers to as the general linear difference model is given, together with the conditions for existence and uniqueness.
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Aggregate Dynamics and Staggered Contracts
TL;DR: In this article, the authors show that staggered wage contracts as short as 1 year are capable of generating the type of unemployment persistence which has been observed during postwar business cycles in the United States.
Journal ArticleDOI
An Optimization-Based Econometric Framework for the Evaluation of Monetary Policy
TL;DR: In this paper, a simple quantitative model of output, interest rate and inflation determination in the United States, and uses it to evaluate alternative rules by which the Fed may set interest rates.
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