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Revisiting the Delegation Problem in a Sticky Price and Wage Economy

  • Gregory Erin Givens

In a stylized economy with price and wage stickiness, this paper argues that delegating a nominal wage target to a central bank operating under discretion generally delivers better social outcomes than delegating price level or inflation targets. Although both policies impart inertia into central bank actions, wage targeting dominates price level targeting because the former delivers a more favorable tradeoff between the stabilization goals appearing in the social welfare function, namely, price inflation, wage inflation, and the output gap. Delegation of a dual policy featuring both price level and nominal wage targets, however, nearly replicates the efficient outcome accompanying the precommitment policy from a timeless perspective.

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Paper provided by Middle Tennessee State University, Department of Economics and Finance in its series Working Papers with number 200601.

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Date of creation: Feb 2006
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Handle: RePEc:mts:wpaper:200601
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