ImperfCredWagesWelfare_revision_v12_press.pdf (760.19 kB)
Imperfect credibility, sticky wages, and welfare
journal contribution
posted on 2023-06-10, 01:09 authored by Ricardo Nunes, Donghyun Park, Luca RondinaThis paper studies optimal monetary policy under imperfect credibility in a New Keynesian model with staggered price and wage setting. In our imperfect credibility framework, the central bank commits to a policy plan but occasionally reneges on past promises with a given common knowledge probability. We find that the welfare gains from increasing credibility are approximately linear on the initial credibility level. We also find that the output-inflation stabilisation trade-off is nonmonotonic as higher credibility does not always reduce output volatility. The variance decomposition shows that wage markup shocks are the main driver of economic fluctuations and that these shocks are better contained, even in relative terms, when credibility is high. We then show that the degree of credibility impacts the effect of wage flexibility on welfare. When credibility is low, monetary policy is less potent and the economy can experience a feedback loop between wage volatility and price volatility. We show, though, that once wage markup shocks are taken into account, wage flexibility is usually welfare improving.
History
Publication status
- Published
File Version
- Accepted version
Journal
Journal of MacroeconomicsISSN
0164-0704Publisher
ElsevierExternal DOI
Volume
70Page range
1-19Article number
a103363Department affiliated with
- Economics Publications
Full text available
- Yes
Peer reviewed?
- Yes
Legacy Posted Date
2021-09-27First Open Access (FOA) Date
2022-08-31First Compliant Deposit (FCD) Date
2021-09-24Usage metrics
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