Optimal Monetary Policy with Staggered Wage and Price Contracts

By C. Erceg, Dale W. Henderson, Andrew T. Levin. Kredit und Kapital, 2000

883 citations recorded by the source corpus.

Abstract We formulate an optimizing-agent model in which both labor and product markets exhibit monopolistic competition and staggered nominal contracts. The unconditional expectation of average household utility can be expressed in terms of the unconditional variances of the output gap, price inflation, and wage inflation. Monetary policy cannot achieve the Pareto-optimal equilibrium that would occur under completely flexible wages and prices; that is, the model exhibits a tradeoff in stabilizing the output gap, price inflation, and wage inflation. We characterize the optimal policy rule for reasonable calibrations of the model. We also find that strict price inflation targeting generates relatively large welfare losses, whereas several other simple policy rules perform nearly as well as the optimal rule. JEL Classification: E31; E32; E52

Subfields: Economics and Econometrics

View Paper: https://www.semanticscholar.org/paper/93bef036e298ffc8cbc71514b319b266ccc474f1

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Citations in the corpus

The Fiscal Multiplier (2019, neutral): “To allow for sticky wages in our heterogeneous worker economy we need to extend the literature which models wage rigidities in representative agent models (Erceg et al., 2000).”
The State of New Keynesian Economics: A Partial Assessment (2018, background): “A selection of examples of such extensions include allowances for staggered wage setting (Erceg et al. 2000), some backward-looking price setting (Steinsson 2003), open economy considerations (Clarida et al. 2002; Galí and Monacelli 2005), deviations from rational expectations (Evans and Honkapohja…”
Central Bank Digital Currency in an Open Economy (2020, neutral): “However, following Erceg et al. (2000), each household member is also member of a union that supplies a different type of labour (i) to firms and optimally negotiates wages.”
The Aggregate Implications of Regional Business Cycles (2019, neutral): “Also, as in Erceg et al. (2000), we assume the existence of a large number of competitive labor agencies that buy all forms of differentiated labor services and transform them into homogeneous labor services, which they then sell for price Wkt.”
Innovation, Productivity, and Monetary Policy (2017, background): “As in Erceg, Henderson and Levin (2000), there is a continuum of households indexed by i ∈ [0, 1], each of which is a monopolistic supplier of specialized labor Li,t.”
The Long-Run Effects of Monetary Policy (2020, background): “These results echo the important early findings by Evans (1992) who cast doubt on the exogeneity of TFP shocks, a key tenet of mainstream DSGE models, finding that money, interest rates, and government spending Granger-caused these impulses.”