Working Paper
Tradeoffs between inflation and output-gap variances in an optimizing-agent model
Abstract: We demonstrate the existence of a monetary policy tradeoff between price-inflation variability and output-gap variability in an optimizing-agent model with staggered nominal wage and price contracts. This variance tradeoff is absent only in the special case in which prices are sticky and wages are perfectly flexible. When the model is calibrated to exhibit an empirically reasonable degree of nominal wage inertia, strict inflation targeting induces substantial output-gap volatility.
Keywords: Inflation (Finance); Prices; Wages;
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Bibliographic Information
Provider: Board of Governors of the Federal Reserve System (U.S.)
Part of Series: International Finance Discussion Papers
Publication Date: 1998
Number: 627