Tradeoffs Between Inflation and Output-Gap Variances in an Optimizing-Agent Model

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

Working Papers from Stockholm - International Economic Studies

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: MONETARY POLICY; INFLATION; WAGES; PRICES; MODELS; ECONOMIC MODELS INTERNATIONAL ECONOMIC STUDIES, S-106 91 STOCKHOLM SWEDEN. 26p. (search for similar items in EconPapers)
JEL-codes: C2 C3 E31 E42 E52 E63 J38 (search for similar items in EconPapers)
Date: 1998
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Working Paper: Tradeoffs between inflation and output-gap variances in an optimizing-agent model (1998)
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