Optimal monetary policy in economies with \"sticky-information\" wages

Evan Koenig

No 405, Working Papers from Federal Reserve Bank of Dallas

Abstract: In economies with sticky-information wage setting, policymakers legitimately give attention to output stabilization as well as price-level or inflation stabilization. Consistent with Kydland and Prescott (1990), trend deviations in prices are predicted to be negatively correlated with trend deviations in output. A variant of the Taylor rule is optimal if household consumption decisions are forward-looking. Interestingly, it is essential that policy not be made contingent on the most up-to-date estimates of potential output, potential-output growth, or the natural real interest rate. New results on the ?persistence problem? and a new rationalization for McCallum?s P-bar inflation equation are also presented.

Keywords: Productivity (search for similar items in EconPapers)
Date: 2004
New Economics Papers: this item is included in nep-mac, nep-mon and nep-sea
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