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

Salem Abo-Zaid ()

Journal of Economics and Econometrics, 2010, vol. 53, issue 1, 28-58

Abstract: This paper studies strict 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 stabilise nominal wages. These results 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; Inflation targeting; Exchange rate pass-through; Nominal wage rigidity; Open economy. (search for similar items in EconPapers)
JEL-codes: E31 E52 E58 E61 F31 (search for similar items in EconPapers)
Date: 2010
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Working Paper: Sticky Wages, Incomplete Pass-Through and Inflation Targeting: What is the Right Index to Target? (2009) Downloads
Working Paper: Sticky Wages, Incomplete Pass-Through and Inflation Targeting: What is the Right Index to Target? (2009) Downloads
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