The Frontier of indeterminacy in a Neo-Keynesian Model with Staggered Prices and Wages
We consider a neo-keynesian model with staggered prices and wages. When both contracts exhibit sluggish adjustment to market conditions, the policy maker faces a trade-off between stabilizing three welfare relevant variables : output, price inflation and wage inflation. We consider a monetary policy rule designed accordingly : the Central Banker can react to both inflations and the output gap. We generalize the Taylor principle in this case : it embeds the frontier of determinacy derived with staggered prices only, it is also symmetric in price and wage inflations. It follows that when staggered labour contracts are considered, wage inflation is also an illegible and efficient target for the Central Banker.
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