Nominal Contracting and Monetary Targets – Drifting into Indexation

Abstract

We look for a theoretical justification of nominal wage contracts in household diversification of risk. In a calibrated general equilibrium model we find from stochastic simulation that if both productivity and monetary shocks are temporary then optimal wage contracts are overwhelmingly nominal. The model suggests that the persistence in monetary shocks not only raises wage protection but also reduces welfare in a world where productivity shocks are persistent, as both theory and our empirical results for the OCED suggest they are. This suggests that this central bank practice is due for review.

Is It Time for Price‐level Targeting?

“…This point was developed in a series of papers by Patrick Minford with various co‐authors (Minford, 2004; Minford and Peel, 2003; Minford, et al. , 2003).…”

Joining the European Monetary Union—Comparing First and Second Generation Open Economy Models

“…2. Note that if we follow the variant approach (Minford et al, 2003) that the nominal rigidity is an optimising arrangement, then the welfare optimum benchmark will be one where welfare is fully stabilised (as if u = 0). In this case optimal monetary policy under floating will set {μ − p} FL = 0 and so μ FL = −(I − A −1 M) −1 (A −1 N )u.…”

Optimal monetary policy: is price‐level targeting the next step?

“…In a recent paper Minford, Nowell and Webb (2003) set up a model where an employed representative agent chooses an optimal degree of wage indexation (to prices and the auction wage) in response to the monetary regime. The model has two exogenous shocks driving it, a demand shock (to the money supply – presumed to originate from monetary policy), and a supply (productivity) shock.…”

“…However, little attention in this work has been paid to the effect of changes in wage contract structure in evaluating price level targeting—an ‘interesting issue’, Svensoon notes, as yet unexplored. Minford, Nowell and Webb (2003) set out a model in which the structure of wage contracts responded to the behaviour of the economy. Ascari (2000) and Casares (2002) have examined respectively how the parameters of Taylor‐type overlapping fixed‐wage contract and of Calvo‐type price‐setters respond.…”