Price and Wage Setting when Accurate Decisions Are Costly: Implications for Monetary Policy Transmission

James Costain and Anton Nakov

Research Bulletin, 2019, vol. 59

Abstract: Recent low inflation is motivating new research to better characterise how individual firms and workers set prices and wages. In this article, we describe a new approach which emphasises that the costs of decision-making may limit the precision of price and wage changes. As well as making better sense of price and wage changes in microeconomic data, this new approach also strikes a middle ground between two leading models of monetary policy transmission, improving our quantitative understanding of the short-run effects of monetary policy on output and the short-run trade-off between inflation and unemployment. JEL Classification: E31, D81, C73

Keywords: control costs; state-dependent adjustment; Sticky prices; sticky wages (search for similar items in EconPapers)
Date: 2019-06
Note: 3308697
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