The Role of Contracting Schemes for Assessing the Welfare Costs of Nominal Rigidities

Matthias Paustian and Juergen von Hagen ()

No 6726, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: Due to the lack of pertinent evidence, there is currently no agreement on how to introduce nominal rigidities into monetary macroeconomic models. We examine the role of alternative assumptions about the wage and price setting mechanisms for the assessment of the welfare costs of nominal rigidities and the performance of alternative monetary policy rules in an otherwise standard New Keynesian general equilibrium model. We find that the choice of a particular price and wage setting scheme matters quantitatively for the welfare costs of nominal rigidities. However, qualitative statements such as the welfare ranking of alternative monetary policy rules are robust to changes in contracting schemes. The difference between sticky nominal contracts and sticky information matters more than the difference in the age distribution of prices wages and information implied by alternative price and wage setting schemes.

Keywords: Calvo Pricing; Monetary Policy Rules; Nominal Rigidities; Sticky Information; Taylor Contracts (search for similar items in EconPapers)
JEL-codes: E32 E52 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba and nep-mac
Date: 2008-02
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