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How Monetary Policy Can Have Permanent Real Effects with Only Temporary Nominal Rigidity

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  • McDonald, Ian M
  • Sibly, Hugh

Abstract

A macroeconomic model is developed in which the psychological concept of loss aversion is incorporated into workers' preferences. The impact of monetary policy in the presence of loss aversion depends on the specification of the reference wage. The plausible specification that a worker's reference wage is the real wage she was paid in the previous period is considered in detail. Specifying the reference wage in this way, we show that an unanticipated change in monetary policy has a permanent, real effect when short term labour contracts are written in nominal wages. Copyright 2001 by Scottish Economic Society.

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  • McDonald, Ian M & Sibly, Hugh, 2001. "How Monetary Policy Can Have Permanent Real Effects with Only Temporary Nominal Rigidity," Scottish Journal of Political Economy, Scottish Economic Society, vol. 48(5), pages 532-546, November.
  • Handle: RePEc:bla:scotjp:v:48:y:2001:i:5:p:532-46
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    Cited by:

    1. Ian McDonald, 2007. "Where Is Full Employment?," Department of Economics - Working Papers Series 1011, The University of Melbourne.
    2. Ahrens, Steffen & Pirschel, Inske & Snower, Dennis J., 2017. "A theory of price adjustment under loss aversion," Journal of Economic Behavior & Organization, Elsevier, vol. 134(C), pages 78-95.
    3. Ahrens, Steffen & Pirschel, Inske & Snower, Dennis J., 2014. "A Theory of Wage Adjustment under Loss Aversion," CEPR Discussion Papers 10288, C.E.P.R. Discussion Papers.
    4. Carlo Di Giorgio & Massimo Giannini, 2012. "A comparison of the Beveridge curve dynamics in Italy and USA," Empirical Economics, Springer, vol. 43(3), pages 945-983, December.
    5. Jeff Borland & Ian McDonald, 2000. "Labour Market Models of Unemployment in Australia," Melbourne Institute Working Paper Series wp2000n15, Melbourne Institute of Applied Economic and Social Research, The University of Melbourne.
    6. Patricia Tovar, 2004. "The Effects of Loss Aversion on Trade Policy and the Anti-Trade Bias Puzzle," Econometric Society 2004 North American Summer Meetings 499, Econometric Society.

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