The Taylor principle is valid under wage stickiness

Blasselle Alexis and Aurélien Poissonnier
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Blasselle Alexis: Laboratoire Jacques-Louis Lions, Université Pierre et Marie Curie (Paris VI), Boîte courrier 187, 75252 Paris Cedex 05, France

The B.E. Journal of Macroeconomics, 2016, vol. 16, issue 2, 581-596

Abstract: We consider the textbook neo-Keynesian model with staggered prices and wages in discrete time. We prove analytically that the Taylor principle holds in this case. When both contracts exhibit sluggish adjustment to market conditions, the policy maker faces a trade-off between stabilizing three welfare relevant variables: output, price inflation and wage inflation. We consider a monetary policy rule designed accordingly: the central banker can react to both inflations and the output gap. In addition to generalizing the Taylor principle we show that the frontier of determinacy embeds the frontier derived with staggered prices only, generalizes the frontier of determinacy in the limit case of continuous time and is symmetric in price and wage inflations.

Keywords: dynamic stochastic general equilibrium model; monetary policy rule; sun spot equilibria; taylor principle (search for similar items in EconPapers)
JEL-codes: C62 C68 E52 E58 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (2)

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Related works:
Working Paper: The Frontier of indeterminacy in a Neo-Keynesian Model with Staggered Prices and Wages (2013)
Working Paper: The frontier of indeterminacy in a neo-Keynesian model with staggered prices and wages (2013)
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DOI: 10.1515/bejm-2014-0160

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