Stabilization policy, rational expectations, and staggered real wage contracts

Francisco L. Lopes

Brazilian Review of Econometrics, 1983, vol. 3, issue 2

Abstract: The paper deals with the controversial question of whether anticipated macropolicies have any effect on real output under rational expectations. It shows that the short run neutrality proposition originated in the new equilibrium theories of the business cycle is invalidated by staggered wage contracts that aim at a target average real wage over the contract span. These staggered "real wage contracts" generate a Phillips Curve link between the acceleration of inflation and unemployment only if their real wage target moves countercyclically. Futhermore, a fully anticipated monetary policy innovation has a direct impact on inflation that is not captured by the unemployment terms of the Phillips Curve.

Date: 1983
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