The consequences of staggered wage setting for the credibility of monetary policy
This paper introduces staggered wage contracts a la Taylor (1979)into a standard model of monetary policy credibility. The overlapping wage structure is shown to considerably exacerbate the time consistent inflation rate in Markov perfect equilibrium. If the central bank can commit to its monetary policy for one-period ahead, this reduces but does not eliminate the inflationary bias. Even if it can commit for a length of time equal to the nominal contract length (i.e., two-periods), this does not generally lead to a zero inflation outcome, and may even lead to negative inflation if the central bank's rate of time discount is sufficiently high.
|Date of creation:||08 Mar 2001|
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