Optimal Monetary Policy under Downward Nominal Wage Rigidity

Mikael Carlsson () and Andreas Westermark ()

No 2007:15, Working Paper Series from Uppsala University, Department of Economics

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, 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)
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
Date: 2007-04-10
View list of references View citations in EconPapers

Downloads: (external link)
http://www.nek.uu.se/pdf/wp2007_15_revised.pdf Revised version (application/pdf)
http://www.nek.uu.se/pdf/wp2007_15.pdf (application/pdf)

Related works:
Working Paper: Optimal Monetary Policy under Downward Nominal Wage Rigidity (2007)
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:hhs:uunewp:2007_015

Access Statistics for this paper

More papers in Working Paper Series from Uppsala University, Department of Economics
Address: Department of Economics, Uppsala University, P. O. Box 513, SE-751 20 Uppsala, Sweden
Contact information at EDIRC.
Series data maintained by Katarina Grönvall ().