Optimal monetary policy in economies with "sticky-information" wages
AbstractIn economies with sticky-information wage setting, policymakers legitimately give attention to output stabilization as well as price-level or inflation stabilization. Consistent with Kydland and Prescott (1990), trend deviations in prices are predicted to be negatively correlated with trend deviations in output. A variant of the Taylor rule is optimal if household consumption decisions are forward-looking. Interestingly, it is essential that policy not be made contingent on the most up-to-date estimates of potential output, potential-output growth, or the natural real interest rate. New results on the “persistence problem” and a new rationalization for McCallum’s P-bar inflation equation are also presented.
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Bibliographic InfoPaper provided by Federal Reserve Bank of Dallas in its series Working Papers with number 0405.
Date of creation: 2004
Date of revision:
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- NEP-ALL-2005-05-23 (All new papers)
- NEP-MAC-2005-05-23 (Macroeconomics)
- NEP-MON-2005-05-23 (Monetary Economics)
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