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|
|Note:||Type of Document - PDF; prepared on IBM-PC; pages: 30 ; figures: included within document. 30 pages, PDF|
|Contact details of provider:|| Web page: http://econwpa.repec.org|
References listed on IDEAS
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- Kenneth Rogoff, 1985. "The Optimal Degree of Commitment to an Intermediate Monetary Target," The Quarterly Journal of Economics, Oxford University Press, vol. 100(4), pages 1169-1189.
- Taylor, John B, 1979. "Staggered Wage Setting in a Macro Model," American Economic Review, American Economic Association, vol. 69(2), pages 108-113, May.
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- repec:fth:harver:1503 is not listed on IDEAS
- Obstfeld, Maurice, 1997. "Dynamic Seigniorage Theory," Macroeconomic Dynamics, Cambridge University Press, vol. 1(03), pages 588-614, September.
- Lockwood, Ben & Philippopoulos, Apostolis, 1994. "Insider Power, Unemployment Dynamics and Multiple Inflation Equilibria," Economica, London School of Economics and Political Science, vol. 61(241), pages 59-77, February.
- Levine, Paul L & Pearlman, Joseph, 1994. "Labour Market Structure, Conservative Bankers and the Feasibility of Monetary Union," CEPR Discussion Papers 903, C.E.P.R. Discussion Papers.
- Fischer, Stanley, 1977. "Long-Term Contracts, Rational Expectations, and the Optimal Money Supply Rule," Journal of Political Economy, University of Chicago Press, vol. 85(1), pages 191-205, February. Full references (including those not matched with items on IDEAS)
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