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Monetary Policy in the Presence of Random Wage Indexation

Author

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  • Jonathan A. Attey

    (Erasmus University Rotterdam, The Netherlands)

  • Casper G. de Vries

    (Erasmus University Rotterdam, The Netherlands)

Abstract

Empirical estimations suggest heavy-tailed unconditional distributions for inflation, the output gap and the interest rate. However, standard NK models used in policy analysis imply normal distributions for these variables. In this study, we propose a model which replicates the above mentioned empirical features of inflation,the output gap and the interest rate and subsequently investigate the conduct of monetary policy in this model. The novelty of this study is the introduction of random wage indexation as a source of multiplicative shocks. The findings of this study include the following: Firstly, the unconditional distributions of inflation, the output gap and the interest rates exhibit heavy-tailed characteristics. Secondly, under an indexation to lagged inflation scheme, there exists a positive relationship between expected inflation and conditional variance of inflation. Finally, it is better to target current inflation rather than lagged inflation when conducting monetary policy under a Taylor rule.

Suggested Citation

  • Jonathan A. Attey & Casper G. de Vries, 2016. "Monetary Policy in the Presence of Random Wage Indexation," Tinbergen Institute Discussion Papers 16-086/VI, Tinbergen Institute.
  • Handle: RePEc:tin:wpaper:20160086
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    6. Kuttner, Kenneth N & Posen, Adam S, 2001. "Beyond Bipolar: A Three-Dimensional Assessment of Monetary Frameworks," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 6(4), pages 369-387, October.
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    More about this item

    Keywords

    Wage Indexation; Monetary Policy;

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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