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Solving RE models with discontinuous policy rules – an application to minimum wage setting in Germany

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  • Bursian, Dirk

Abstract

The legal regulations require the minimum wage in Germany to be adjusted biennially which gives rise to a policy discontinuity. From the perspective of rational expectations models, such policy features render standard local approximation techniques infeasible. The paper presents a stylised model in which negotiated wages and corporate profits are the outcome of an optimisation problem, while changes to the minimum wage are modelled by a discontinuous policy rule. Using the simple example of minimum wage setting in Germany, the paper illustrates how such models can be solved using the method of undetermined coefficients and presents selected simulation results.

Suggested Citation

  • Bursian, Dirk, 2016. "Solving RE models with discontinuous policy rules – an application to minimum wage setting in Germany," Discussion Papers 35/2016, Deutsche Bundesbank.
    • Handle: RePEc:zbw:bubdps:352016
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    More about this item

    Keywords

    rational expectations model; discontinuous policy rule; method of undetermined coefficients;
    All these keywords.

    JEL classification:

    • E1 - Macroeconomics and Monetary Economics - - General Aggregative Models
    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook

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