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The Role of Contracting Schemes for Assessing the Welfare Costs of Nominal Rigidities

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Paustian, Matthias
von Hagen, Jürgen

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Abstract

Due to the lack of pertinent evidence, there is currently no agreement on how to introduce nominal rigidities into monetary macroeconomic models. We examine the role of alternative assumptions about the wage and price setting mechanisms for the assessment of the welfare costs of nominal rigidities and the performance of alternative monetary policy rules in an otherwise standard New Keynesian general equilibrium model. We find that the choice of a particular price and wage setting scheme matters quantitatively for the welfare costs of nominal rigidities. However, qualitative statements such as the welfare ranking of alternative monetary policy rules are robust to changes in contracting schemes. The difference between sticky nominal contracts and sticky information matters more than the difference in the age distribution of prices wages and information implied by alternative price and wage setting schemes.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 6726.

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Date of creation: Feb 2008
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Handle: RePEc:cpr:ceprdp:6726

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Related research
Keywords: Calvo Pricing; Monetary Policy Rules; Nominal Rigidities; Sticky Information; Taylor Contracts;

Find related papers by JEL classification:
E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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