Seminar Papers, Institute for International Economic Studies, Stockholm University
Christopher J. Erceg
Tradeoffs Between Inflation and Output-Gap Variances in an Optimizing-Agent Model
(), Dale W. Henderson and Andrew T. Levin
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 degreee of nominal wage inertia,
strict inflation targeting induces substantial output-gap volatility.
Keywords: monetary policy tradeoff; price-inflation variability; output-gap variability; (follow links to similar papers)
JEL-Codes: E42; E52; (follow links to similar papers)
41 pages, September 1, 1998
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