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Optimal Monetary Policy with Endogenous Contracts: Should we Return to a Commodity Standard?


  • Minford, Patrick
  • Nowell, Eric


A representative agent who is employed chooses an optimal degree of wage indexation (to prices and the auction wage) in response to the monetary regime. Should that regime target the growth rate or the level of the money supply, or of prices (as in a commodity standard)? We find that, contrary to the usual finding from macroeconomic models with fixed wage contract structures, there are gains in welfare for the average household, with both real wages and employment being stabilized. The reason is that when the monetary regime shifts to targeting levels, indexation falls markedly; this flattens the aggregate supply curve and steepens the aggregate demand curve, providing a high degree of ‘automatic’ stabilization. The choice between targeting money or prices creates a trade-off between employment and real wage stability-implying a distributional conflict between insiders and outsiders in the labour market.

Suggested Citation

  • Minford, Patrick & Nowell, Eric, 2000. "Optimal Monetary Policy with Endogenous Contracts: Should we Return to a Commodity Standard?," CEPR Discussion Papers 2616, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:2616

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    References listed on IDEAS

    1. McCallum, Bennett T. & Nelson, Edward, 1999. "Nominal income targeting in an open-economy optimizing model," Journal of Monetary Economics, Elsevier, vol. 43(3), pages 553-578, June.
    2. Minford, Patrick & Nowell, Eric & Webb, Bruce, 1999. "Nominal Contracts and Monetary Targets," CEPR Discussion Papers 2215, C.E.P.R. Discussion Papers.
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    More about this item


    Inflation Targeting; Interest Rate Setting; Monetary Rules; Price Level Targeting;

    JEL classification:

    • E0 - Macroeconomics and Monetary Economics - - General
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General


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