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The frontier of indeterminacy in a neo-Keynesian model with staggered prices and wages

By Alexis Blasselle and Aurélien Poissonnier

Abstract

We consider a neo-Keynesian model with staggered prices and wages. When both contracts exhibit sluggish adjustment to market conditions, the policy maker faces a trade-off between stabilizing three welfare relevant variables: output, price inflation and wage inflation. We consider a monetary policy rule designed accordingly: the Central Banker can react to both inflations and the output gap. We generalize the Taylor principle in this case: it embeds the frontier of determinacy derived with staggered prices only, it is also symmetric in price and wage inflations. It follows that when staggered labour contracts are considered, wage inflation is also an illegible and efficient target for the Central Banker

Topics: Taylor Principle, Dynamic Stochastic Général Equilibrium Model, Monetary Policy Rule, Sun Spot Equilibria, Taylor Principle., JEL : C - Mathematical and Quantitative Methods/C.C6 - Mathematical Methods • Programming Models • Mathematical and Simulation Modeling/C.C6.C62 - Existence and Stability Conditions of Equilibrium, JEL : C - Mathematical and Quantitative Methods/C.C6 - Mathematical Methods • Programming Models • Mathematical and Simulation Modeling/C.C6.C68 - Computable General Equilibrium Models, JEL : E - Macroeconomics and Monetary Economics/E.E1 - General Aggregative Models/E.E1.E12 - Keynes • Keynesian • Post-Keynesian, JEL : E - Macroeconomics and Monetary Economics/E.E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit/E.E5.E58 - Central Banks and Their Policies, JEL : C - Mathematical and Quantitative Methods/C.C6 - Mathematical Methods • Programming Models • Mathematical and Simulation Modeling/C.C6.C61 - Optimization Techniques • Programming Models • Dynamic Analysis, [ SHS.ECO ] Humanities and Social Sciences/Economies and finances
Publisher: HAL CCSD
Year: 2013
OAI identifier: oai:HAL:hal-00915913v1
Provided by: Hal-Diderot

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