Tradeoffs between inflation and output-gap variances in an optimizing-agent model

Christopher John Erceg, Dale W. Henderson and Andrew Theo Levin ()

No 627, International Finance Discussion Papers from Board of Governors of the Federal Reserve System (U.S.)

Abstract: We demonstrate the existence of a monetary policy tradeoff between price-inflation variability and output-gap variability in an optimizing-agent model with staggered nominal wage and price contracts. This variance tradeoff is absent only in the special case in which prices are sticky and wages are perfectly flexible. When the model is calibrated to exhibit an empirically reasonable degree of nominal wage inertia, strict inflation targeting induces substantial output-gap volatility.

Keywords: Inflation (Finance); Prices; Wages (search for similar items in EconPapers)
Date: 1998
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Related works:
Working Paper: Tradeoffs Between Inflation and Output-Gap Variances in an Optimizing-Agent Model (1998)
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