Sticky Wages, Incomplete Pass-Through and Inflation Targeting: What is the Right Index to Target?

Abo-Zaid, Salem
Authors registered in the RePEc Author Service: Salem Mosa Abo Zaid ()

MPRA Paper from University Library of Munich, Germany

Abstract: This paper studies monetary policy rules in a small open economy with Inflation Targeting, incomplete pass-through and rigid nominal wages. The paper shows that, when nominal wages are fully flexible and pass-through is low to moderate, the monetary authority should target the consumer price index (CPI) rather than the Domestic Price Index (DPI). When pass-through is high, an economy with high degrees of nominal wage rigidity and wage indexation should either target the CPI or fully stabilize nominal wages. The results of the paper suggest that, by committing to a common monetary policy in a common-currency area, some countries may not be following the right monetary policy rules.

Keywords: Monetary Policy Rules; Incomplete Pass-Through; Sticky Wages; Inflation Targeting; Conumer Price Index; Domestic Price Index (search for similar items in EconPapers)
JEL-codes: E12 E31 E52 E4 F31 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-lab, nep-mac and nep-mon
Date: 2009-02-05
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http://mpra.ub.uni-muenchen.de/13177/ orginal version
http://mpra.ub.uni-muenchen.de/16966/ revised version

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Persistent link: http://EconPapers.repec.org/RePEc:pra:mprapa:13177

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