Working Paper: CEPR ID: DP3612
Authors: Patrick Minford; David Peel
Abstract: Nominal price and wage rigidity renders monetary policy effective over output. However, this effectiveness extends, under widely used overlapping-wage and Calvo-contract Phillips Curves, to planned monetary policy (?exploitability?) and not merely to policy surprises. We argue that within both frameworks, when agents write optimal nominal contracts, they will not be exploitable by planned monetary policy. We therefore suggest non-exploitability as a specification test for Phillips Curves.
Keywords: Calvo contract; overlapping wages; Phillips curve
JEL Codes: E24; E32; J41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Nominal price and wage rigidity (E31) | Effectiveness of monetary policy (E52) |
| Writing of optimal nominal contracts (D86) | Non-exploitability by planned monetary policy (E49) |
| Nominal price and wage rigidity (E31) | Output (Y10) |