Working Paper: CEPR ID: DP903
Authors: Paul Levine; Joseph Pearlman
Abstract: This paper examines the conduct of monetary policy in an economy with overlapping multi-period nominal wage contracts. We examine the welfare implications of stabilization policy in the face of random supply shocks. In the absence of precommitment, the discretionary policy can be improved by choosing bankers who are more conservative than the `median voter' in that they attach a higher priority to achieving low inflation than higher output. The choice of an optimal banker depends on the degree of nominal and real wage rigidities and the presence of the latter can improve the feasibility of a monetary union.
Keywords: Conservative Bankers; Labour Market Structure; European Central Bank
JEL Codes: E58; J41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| appointing a more conservative banker than the median voter (E58) | higher social welfare (D69) |
| central banker's conservatism (E58) | inflation outcomes (E31) |
| increased nominal and real wage stickiness (J39) | increased conservatism of the optimal banker (G21) |
| indexing (C43) | optimal choice of banker (G21) |
| conservatism of the optimal banker (G21) | inflation stabilization (E31) |