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Trend inflation as a workers disciplining device in a general equilibrium model

Giovanni Di Bartolomeo (), Patrizio Tirelli () and Nicola Acocella

No 142, Working Papers from University of Milano-Bicocca, Department of Economics

Abstract: In New Keynesian models nominal rigidities determine socially ineffi - cient outcomes. Our paper reverses this view: properly designed monetary policies may take advantage of predetermined nominal wages to discipline monopolistic wage setters. This, in turn, requires accepting a non-zero in- flation rate. Discretionary monetary policy is effective when wage setters are non atomistic. Inflation targeting has real effects irrespective of the degree of labor market centralization.

Keywords: inflation bias; discretionary monetary policy; non-zero inflation targeting; unemployment; strategic wage setters (search for similar items in EconPapers)
JEL-codes: E52 E58 J51 E24 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-lab and nep-mac
Date: 2008-07, Revised 2008-07
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