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Optimal monetary policy in economies with "sticky-information" wages

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  • Evan F. Koenig

Abstract

In economies with sticky-information wage setting, policymakers legitimately give attention to output stabilization as well as price-level or inflation stabilization. Consistent with Kydland and Prescott (1990), trend deviations in prices are predicted to be negatively correlated with trend deviations in output. A variant of the Taylor rule is optimal if household consumption decisions are forward-looking. Interestingly, it is essential that policy not be made contingent on the most up-to-date estimates of potential output, potential-output growth, or the natural real interest rate. New results on the “persistence problem” and a new rationalization for McCallum’s P-bar inflation equation are also presented.

Suggested Citation

  • Evan F. Koenig, 2004. "Optimal monetary policy in economies with "sticky-information" wages," Working Papers 0405, Federal Reserve Bank of Dallas.
  • Handle: RePEc:fip:feddwp:04-05
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    File URL: http://www.dallasfed.org/assets/documents/research/papers/2004/wp0405.pdf
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    Cited by:

    1. Wang, Pengfei & Wen, Yi, 2007. "Inflation dynamics: A cross-country investigation," Journal of Monetary Economics, Elsevier, vol. 54(7), pages 2004-2031, October.
    2. WilliamA. Branch & John Carlson & GeorgeW. Evans & Bruce McGough, 2009. "Monetary Policy, Endogenous Inattention and the Volatility Trade-off," Economic Journal, Royal Economic Society, vol. 119(534), pages 123-157, January.
    3. repec:hrv:faseco:33907956 is not listed on IDEAS
    4. Woodford, Michael, 2010. "Optimal Monetary Stabilization Policy," Handbook of Monetary Economics,in: Benjamin M. Friedman & Michael Woodford (ed.), Handbook of Monetary Economics, edition 1, volume 3, chapter 14, pages 723-828 Elsevier.

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    Keywords

    Productivity;

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