Monetary Policy under Downward Nominal Wage Rigidity

Mikael Carlsson () and Andreas Westermark
Additional contact information
Andreas Westermark: Sveriges Riksbank & Uppsala University

The B.E. Journal of Macroeconomics, 2008, vol. 8, issue 1

Abstract: We develop a New Keynesian model with staggered price and wage setting where downward nominal wage rigidity (DNWR) arises endogenously through the wage bargaining institutions. It is shown that the optimal (discretionary) monetary policy response to changing economic conditions then becomes asymmetric. Interestingly, in our baseline model we find that the welfare loss is actually slightly smaller in an economy with DNWR. This is due to that DNWR is not an additional constraint on the monetary policy problem. Instead, it is a constraint that changes the choice set and opens up for potential welfare gains due to lower wage variability. Another finding is that the Taylor rule provides a fairly good approximation of optimal policy under DNWR. In contrast, this result does not hold in the unconstrained case. In fact, under the Taylor rule, agents would clearly prefer an economy with DNWR before an unconstrained economy ex ante.

Keywords: monetary policy; wage bargaining; downward nominal wage rigidity (search for similar items in EconPapers)
JEL-codes: E52 E58 J41 (search for similar items in EconPapers)
Date: 2008
View citations in EconPapers

Downloads: (external link)
http://www.bepress.com/cgi/viewcontent.cgi?article=1809&context=bejm (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: http://EconPapers.repec.org/RePEc:bpj:bejmac:v:8:y:2008:i:1:n:28

Access Statistics for this article

More articles in The B.E. Journal of Macroeconomics from Berkeley Electronic Press
Series data maintained by Avi Warner ().