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The consequences of staggered wage setting for the credibility of monetary policy

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Author Info

  • Olga Arratibel

    (Banco Central Hispanoamericano Madrid)

  • Jonathan P. Thomas

    (University of St Andrews)

Abstract

This paper introduces staggered wage contracts a la Taylor (1979)into a standard model of monetary policy credibility. The overlapping wage structure is shown to considerably exacerbate the time consistent inflation rate in Markov perfect equilibrium. If the central bank can commit to its monetary policy for one-period ahead, this reduces but does not eliminate the inflationary bias. Even if it can commit for a length of time equal to the nominal contract length (i.e., two-periods), this does not generally lead to a zero inflation outcome, and may even lead to negative inflation if the central bank's rate of time discount is sufficiently high.

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File URL: http://128.118.178.162/eps/mac/papers/0103/0103002.pdf
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Bibliographic Info

Paper provided by EconWPA in its series Macroeconomics with number 0103002.

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Length: 30 pages
Date of creation: 08 Mar 2001
Date of revision:
Handle: RePEc:wpa:wuwpma:0103002

Note: Type of Document - PDF; prepared on IBM-PC; pages: 30 ; figures: included within document. 30 pages, PDF
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Web page: http://128.118.178.162

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Keywords: staggered wage contracts time consistency commitment;

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  1. Rogoff, Kenneth, 1985. "The Optimal Degree of Commitment to an Intermediate Monetary Target," The Quarterly Journal of Economics, MIT Press, vol. 100(4), pages 1169-89, November.
  2. Robert J. Barro & David B. Gordon, 1981. "A Positive Theory of Monetary Policy in a Natural-Rate Model," NBER Working Papers 0807, National Bureau of Economic Research, Inc.
  3. Obstfeld, Maurice, 1997. "Dynamic Seigniorage Theory," Macroeconomic Dynamics, Cambridge University Press, vol. 1(03), pages 588-614, September.
  4. Levine, Paul L & Pearlman, Joseph, 1994. "Labour Market Structure, Conservative Bankers and the Feasibility of Monetary Union," CEPR Discussion Papers 903, C.E.P.R. Discussion Papers.
  5. repec:fth:harver:1503 is not listed on IDEAS
  6. Lockwood, Ben & Philippopoulos, Apostolis, 1994. "Insider Power, Unemployment Dynamics and Multiple Inflation Equilibria," Economica, London School of Economics and Political Science, vol. 61(241), pages 59-77, February.
  7. Taylor, John B, 1979. "Staggered Wage Setting in a Macro Model," American Economic Review, American Economic Association, vol. 69(2), pages 108-13, May.
  8. Fischer, Stanley, 1977. "Long-Term Contracts, Rational Expectations, and the Optimal Money Supply Rule," Journal of Political Economy, University of Chicago Press, vol. 85(1), pages 191-205, February.
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