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Which price level to target? Strategic delegation in a sticky price and wage economy

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  • Givens, Gregory E.

Abstract

This paper assesses the value of delegating price level targets to a discretionary central bank in an economy with nominal frictions in both labor and product markets. In contrast to recent studies that demonstrate the benefits of targeting the price of output, model simulations provide evidence that favors targeting the price of labor, or the nominal wage, instead. While both policies impart inertia (a salient feature of commitment), wage targeting dominates output price targeting because the former delivers more favorable tradeoffs between the stabilization goals appearing in the social welfare function. Delegating joint price and wage targets, however, nearly replicates the commitment policy from a timeless perspective.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Macroeconomics.

Volume (Year): 31 (2009)
Issue (Month): 4 (December)
Pages: 685-698

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Handle: RePEc:eee:jmacro:v:31:y:2009:i:4:p:685-698

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Web page: http://www.elsevier.com/locate/inca/622617

Related research

Keywords: Price targeting Wage targeting Delegation Timeless perspective;

References

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Cited by:
  1. Sofía Bauducco & Rodrigo Caputo, 2010. "Price Level Targeting and Inflation Targeting: a Review," Working Papers Central Bank of Chile 601, Central Bank of Chile.
  2. Seip, Knut L. & McNown, Robert, 2013. "Monetary policy and stability during six periods in US economic history: 1959–2008: a novel, nonlinear monetary policy rule," Journal of Policy Modeling, Elsevier, vol. 35(2), pages 307-325.

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