Solving RE models with discontinuous policy rules – an application to minimum wage setting in Germany

Dirk Bursian

No 35/2016, Discussion Papers from Deutsche Bundesbank

Abstract: The legal regulations require the minimum wage in Germany to be adjusted biennially which gives rise to a policy discontinuity. From the perspective of rational expectations models, such policy features render standard local approximation techniques infeasible. The paper presents a stylised model in which negotiated wages and corporate profits are the outcome of an optimisation problem, while changes to the minimum wage are modelled by a discontinuous policy rule. Using the simple example of minimum wage setting in Germany, the paper illustrates how such models can be solved using the method of undetermined coefficients and presents selected simulation results.

Keywords: rational expectations model; discontinuous policy rule; method of undetermined coefficients (search for similar items in EconPapers)
JEL-codes: E1 E6 (search for similar items in EconPapers)
Date: 2016
New Economics Papers: this item is included in nep-mac
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Journal Article: Solving RE models with discontinuous policy rules – an application to minimum wage setting in Germany (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:bubdps:352016

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