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Employment, wages and optimal monetary policy

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  • Bodenstein, Martin
  • Zhao, Junzhu

Abstract

We study optimal monetary policy when the policymaker is uncertain whether the cyclical properties of employment and wages are determined by sticky nominal wages or by search and matching frictions in the labor market. Unless the policymaker is almost certain about the search and matching model being the true data-generating process, the policymaker chooses to stabilize wage inflation at the expense of price inflation, the policy resembling the optimal policy in the sticky wage model, regardless of the true model. This finding reflects the greater sensitivity of welfare losses in the sticky wage model to deviations from the model-specific optimal policy.

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  • Bodenstein, Martin & Zhao, Junzhu, 2020. "Employment, wages and optimal monetary policy," Journal of Monetary Economics, Elsevier, vol. 112(C), pages 77-96.
  • Handle: RePEc:eee:moneco:v:112:y:2020:i:c:p:77-96
    DOI: 10.1016/j.jmoneco.2019.01.019
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    Cited by:

    1. Gross, Isaac & Hansen, James, 2021. "Optimal policy design in nonlinear DSGE models: An n-order accurate approximation," European Economic Review, Elsevier, vol. 140(C).
    2. Campbell, Carl, 2023. "The Specification of Lagged Inflation in the Wage Phillips Curve," MPRA Paper 117570, University Library of Munich, Germany.
    3. Gelain, Paolo & Manganelli, Simone, 2020. "Monetary policy with judgment," Working Paper Series 2404, European Central Bank.
    4. Carl E. Walsh, 2019. "Alternatives to Inflation Targeting in Low Interest Rate Environments," IMES Discussion Paper Series 19-E-13, Institute for Monetary and Economic Studies, Bank of Japan.

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    More about this item

    Keywords

    Optimal monetary policy; Optimal targeting rules; Search and matching; Sticky wages; Model uncertainty;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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