Journal Article

Optimal monetary policy in an economy with sticky nominal wages

Abstract: In this article, Evan Koenig derives the optimal monetary policy rule for an economy with contractual wage agreements. The optimal rule has the monetary authority target a weighted average of aggregate output and the price level. In a realistic special case, the optimal rule calls for the monetary authority to target aggregate nominal spending. The optimal rule is quite general in form, encompassing policy proposals made by such prominent economists as Robert Hall and John Taylor. ; Koenig points out that if the monetary authority responds optimally to economic shocks, it will be difficult to distinguish the effects of monetary policy from the effects of the shocks themselves. So, the important contribution that monetary policy makes to the economy may easily be overlooked. Paradoxically, only insofar as monetary policy is implemented with error will it be apparent that monetary policy matters.

Keywords: Monetary policy; Wages;

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Bibliographic Information

Provider: Federal Reserve Bank of Dallas

Part of Series: Economic and Financial Policy Review

Publication Date: 1995

Issue: Q II

Pages: 24-31