Exact utilities under alternative monetary rules in a simple macro model with optimizing agents

Dale Henderson and Jinill Kim

No 635, International Finance Discussion Papers from Board of Governors of the Federal Reserve System (U.S.)

Abstract: We construct an optimizing-agent model of a closed economy which is simple enough that we can use it to make exact utility calculations. There is a stabilization problem because there are one-period nominal contracts for wages, or prices, or both and shocks that are unknown at the time when contracts are signed. We evaluate alternative monetary policy rules using the utility function of the representative agent. Fully optimal policy can attain the Pareto-optimal equilibrium. Fully optimal policy is contrasted with both 'naive' and 'sophisticated' simple rules that involve, respectively, complete stabilization and optimal stabilization of one variable or a combination of two variables. With wage contracts, outcomes depend crucially on whether there are also price contracts. For example, if labor supply is relatively inelastic, for productivity shocks, nominal income stabilization yields higher welfare when there are no price contracts. However, with price contracts, outcomes are independent of whether there are wage contracts, except, of course, for the nominal wage.

Keywords: Monetary policy; Wages; Prices (search for similar items in EconPapers)
Date: 1999
New Economics Papers: this item is included in nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (18)

Downloads: (external link)
http://www.federalreserve.gov/pubs/ifdp/1999/635/default.htm (text/html)
http://www.federalreserve.gov/pubs/ifdp/1999/635/ifdp635.pdf (application/pdf)

Related works:
Journal Article: Exact Utilities under Alternative Monetary Rules in a Simple Macro Model with Optimizing Agents (1999)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgif:635

Access Statistics for this paper

More papers in International Finance Discussion Papers from Board of Governors of the Federal Reserve System (U.S.) Contact information at EDIRC.
Bibliographic data for series maintained by Ryan Wolfslayer ; Keisha Fournillier ().