Working Paper: CEPR ID: DP6726
Authors: Matthias Paustian; Jürgen von Hagen
Abstract: Due to the lack of pertinent evidence, there is currently no agreement on how to introduce nominal rigidities into monetary macroeconomic models. We examine the role of alternative assumptions about the wage and price setting mechanisms for the assessment of the welfare costs of nominal rigidities and the performance of alternative monetary policy rules in an otherwise standard New Keynesian general equilibrium model. We find that the choice of a particular price and wage setting scheme matters quantitatively for the welfare costs of nominal rigidities. However, qualitative statements such as the welfare ranking of alternative monetary policy rules are robust to changes in contracting schemes. The difference between sticky nominal contracts and sticky information matters more than the difference in the age distribution of prices wages and information implied by alternative price and wage setting schemes.
Keywords: Calvo Pricing; Monetary Policy Rules; Nominal Rigidities; Sticky Information; Taylor Contracts
JEL Codes: E32; E52
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| price and wage setting mechanisms (E64) | welfare costs of nominal rigidities (D69) |
| older contracts (L14) | welfare costs of nominal rigidities (D69) |
| monetary policy rules (E52) | welfare ranking of alternative monetary policy rules (E63) |
| sticky information models (C54) | welfare costs of nominal rigidities (D69) |