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Optimal monetary policy in economies with "sticky-information" wages

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  • Evan F. Koenig

Abstract

In 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 Info

Paper provided by Federal Reserve Bank of Dallas in its series Working Papers with number 0405.

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Date of creation: 2004
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Handle: RePEc:fip:feddwp:04-05

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Keywords: Productivity;

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Cited by:
  1. Wiliam Branch & John Carlson & George W. Evans & Bruce McGough, 2004. "Monetary Policy, Endogenous Inattention, and the Volatility Trade-off," University of Oregon Economics Department Working Papers 2004-19, University of Oregon Economics Department, revised 15 May 2007.
  2. Michael Woodford, 2010. "Optimal Monetary Stabilization Policy," NBER Working Papers 16095, National Bureau of Economic Research, Inc.
  3. Wang, Pengfei & Wen, Yi, 2007. "Inflation dynamics: A cross-country investigation," Journal of Monetary Economics, Elsevier, vol. 54(7), pages 2004-2031, October.

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