IDEAS home Printed from https://ideas.repec.org/p/cpr/ceprdp/2616.html

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

Author

Listed:
  • Minford, Patrick
  • Nowell, Eric

Abstract

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, Centre for Economic Policy Research.
    • Handle: RePEc:cpr:ceprdp:2616
    as

    Download full text from publisher

    File URL: https://cepr.org/publications/DP2616
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Minford, Patrick & Nowell, Eric & Webb, Bruce, 1999. "Nominal Contracts and Monetary Targets," CEPR Discussion Papers 2215, Centre for Economic Policy Research.
    2. Robert E. Hall, 1984. "Monetary strategy with an elastic price standard," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 137-167.
    3. 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.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Patrick Minford & Prakriti Sofat, 2004. "An Open Economy Real Business Cycle Model for the UK," Money Macro and Finance (MMF) Research Group Conference 2004 23, Money Macro and Finance Research Group.
    2. Minford, Patrick & Srinivasan, Naveen & Perugini, Francesco, 2001. "The Observational Equivalence of Taylor Rule and Taylor-Type Rules," CEPR Discussion Papers 2959, Centre for Economic Policy Research.
    3. Lars E. O. Svensson, 2001. "Price Stability as a Target for Monetary Policy: Defining and Maintaining Price Stability," Palgrave Macmillan Books, in: Deutsche Bundesbank (ed.), The Monetary Transmission Process, chapter 2, pages 60-111, Palgrave Macmillan.
    4. Evan F. Koenig, 2013. "Like a Good Neighbor: Monetary Policy, Financial Stability, and the Distribution of Risk," International Journal of Central Banking, International Journal of Central Banking, vol. 9(2), pages 57-82, June.
    5. Orphanides, Athanasios & Williams, John C., 2008. "Learning, expectations formation, and the pitfalls of optimal control monetary policy," Journal of Monetary Economics, Elsevier, vol. 55(Supplemen), pages 80-96, October.
    6. Eric Parrado & Andrés Velasco, 2002. "Alternative Monetary Rules in the Open Economy: A Welfare-Based Approach," Central Banking, Analysis, and Economic Policies Book Series, in: Norman Loayza & Raimundo Soto & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Series Editor) (ed.),Inflation Targeting: Desing, Performance, Challenges, edition 1, volume 5, chapter 7, pages 295-348, Central Bank of Chile.
    7. Antonella Trigari, 2006. "The Role of Search Frictions and Bargaining for Inflation Dynamics," Working Papers 304, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
    8. Svensson, Lars E. O., 1999. "Inflation targeting as a monetary policy rule," Journal of Monetary Economics, Elsevier, vol. 43(3), pages 607-654, June.
    9. Laxton, Douglas & Pesenti, Paolo, 2003. "Monetary rules for small, open, emerging economies," Journal of Monetary Economics, Elsevier, vol. 50(5), pages 1109-1146, July.
    10. Benchimol, Jonathan & Bounader, Lahcen, 2023. "Optimal monetary policy under bounded rationality," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, vol. 67, pages 1-25.
    11. Lars E. O. Svensson, 2000. "The First Year of the Eurosystem: Inflation Targeting or Not?," American Economic Review, American Economic Association, vol. 90(2), pages 95-99, May.
    12. Mehra, Yash P., 2002. "Level and growth policy rules and actual Fed policy since 1979," Journal of Economics and Business, Elsevier, vol. 54(6), pages 575-594.
    13. Vladimir Kühl Teles & Joaquim P. Andrade, 2005. "Crime And Punishment With Habit Formation," Anais do XXXIII Encontro Nacional de Economia [Proceedings of the 33rd Brazilian Economics Meeting] 090, ANPEC - Associação Nacional dos Centros de Pós-Graduação em Economia [Brazilian Association of Graduate Programs in Economics].
    14. Patrizio Tirelli & V. Anton Muscatelli & Carmine Trecroci, 2004. "The interaction of fiscal and monetary policies: some evidence using structural econometric models'," Money Macro and Finance (MMF) Research Group Conference 2003 103, Money Macro and Finance Research Group.
    15. Benchimol, Jonathan & Fourçans, André, 2016. "Nominal income versus Taylor-type rules in practice," ESSEC Working Papers WP1610, ESSEC Research Center, ESSEC Business School.
    16. Le, Vo Phuong Mai & Matthews, Kent & Meenagh, David & Minford, Patrick & Xiao, Zhiguo, 2021. "Shadow banks, banking policies and China’s macroeconomic fluctuations," Journal of International Money and Finance, Elsevier, vol. 116(C).
    17. Sylvia Staudinger, 2000. "Inflation Targeting versus Nominal Income Targeting," CESifo Working Paper Series 301, CESifo.
    18. Iris Claus & Kunhong Kim, 2006. "Credit Market Frictions In An Open Economy," CAMA Working Papers 2006-04, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    19. Tsung-wu Ho, 2009. "The inflation rates may accelerate after all: panel evidence from 19 OECD economies," Empirical Economics, Springer, vol. 36(1), pages 55-64, February.
    20. Charles Goodhart & Boris Hofmann, 2005. "The IS curve and the transmission of monetary policy: is there a puzzle?," Applied Economics, Taylor & Francis Journals, vol. 37(1), pages 29-36.

    More about this item

    Keywords

    ;
    ;
    ;
    ;

    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

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:cpr:ceprdp:2616. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: CEPR (email available below). General contact details of provider: https://cepr.org/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.