Employment, Wages and Optimal Monetary Policy

Martin Bodenstein and Junzhu Zhao ()

No 2017-091, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: We study optimal monetary policy when the empirical evidence leaves the policymaker uncertain whether the true data-generating process is given by a model with sticky wages or a model with search and matching frictions in the labor market. Unless the policymaker is almost certain about the search and matching model being the correct data-generating process, the policymaker chooses to stabilize wage inflation at the expense of price inflation, a policy resembling the policy that is optimal in the sticky wage model, regardless of the true model. This finding reflects the greater sensitivity of welfare losses to deviations from the model-specific optimal policy in the sticky wage model. Thus, uncertainty about important aspects of the structure of the economy does not necessarily translate into uncertainty about the features of good monetary policy.

Keywords: Model uncertainty; Optimal monetary policy; Optimal targeting rules; Search and matching; Sticky wages (search for similar items in EconPapers)
JEL-codes: E52 (search for similar items in EconPapers)
Pages: 54 pages
Date: 2017-08-29
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Related works:
Journal Article: Employment, wages and optimal monetary policy (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgfe:2017-91

DOI: 10.17016/FEDS.2017.091

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