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Tradeoffs Between Inflation and Output-Gap Variances in an Optimizing-Agent Model

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  • Erceg, C.J.
  • Henderson, D.W.
  • Levin, A.T.

Abstract

We demonstrate the existence of a monetary policy tradeoff between price-inflation variability and output-gap variability in an optimizing-agent model with staggered nominal wage and price contracts. This variance tradeoff is absent only in the special case in which prices are sticky and wages are perfectly flexible. When the model is calibrated to exhibit an empirically reasonable degree of nominal wage inertia, strict inflation targeting induces substantial output-gap volatility.

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Bibliographic Info

Paper provided by Stockholm - International Economic Studies in its series Papers with number 650.

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Date of creation: 1998
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Handle: RePEc:fth:stocin:650

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Keywords: MONETARY POLICY ; INFLATION ; WAGES ; PRICES ; MODELS ; ECONOMIC MODELS INTERNATIONAL ECONOMIC STUDIES; S-106 91 STOCKHOLM SWEDEN. 26p.;

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References

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Cited by:
  1. Lavan Mahadeva & Katerina Smidkova, 2003. "What is the Appropriate Rate of Disinflation to Be Targeted in the Czech Economy?," Macroeconomics 0303015, EconWPA.
  2. Philip Arestis & Kostas Mouratidis, 2003. "Is There A Trade-Off Between Inflation Variability And Output-Gap Variability in The EMU Countries?," Macroeconomics 0301005, EconWPA.
  3. Luca Benati, 2001. "Band-pass filtering, cointegration, and business cycle analysis," Bank of England working papers 142, Bank of England.
  4. Lavan Mahadeva & Katerina Smidkova, 2004. "Modelling transmission mechanism of monetary policy in the Czech Republic," Macroeconomics 0402032, EconWPA.
  5. Andrew Levin & Christopher J. Erceg & Dale W. Henderson, 1999. "Optimal Monetary Policy with Staggered Wage and Price Contracts," Computing in Economics and Finance 1999 1151, Society for Computational Economics.
  6. Hakan, Yilmazkuday, 2009. "Is there a Role for International Trade Costs in Explaining the Central Bank Behavior?," MPRA Paper 15951, University Library of Munich, Germany.
  7. Alex Lammertsma & Clemens J. M. Kool, 2000. "The Phillips Curve, the Persistence of Inflation, and the Lucas Critique: Evidence from Exchange-Rate Regimes: Comment," American Economic Review, American Economic Association, vol. 90(1), pages 312-315, March.

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