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Credibility, Ambiguity and Asymmetric Information with Wage Stickiness

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  • Levine, Paul L
  • Pearlman, Joseph G

Abstract

The effect of asymmetric information on monetary policy is investigated in the context of an overlapping wage contract model. Optimal rules with and without precommitment under full information are compared with the optimal rule without precommitment (i.e., the discretionary rule) under asymmetric information. The results extend those of A. Cukierman and A. H. Meltzer (1986) to a dynamic model with a short-run output/inflation trade-off. The optimal discretionary rate is less than that under full information and there is also a role for ambiguity in the setting of monetary policy. Both effects of asymmetric information diminish as the average length of wage contracts increases. Copyright 1994 by Blackwell Publishers Ltd and The Victoria University of Manchester

Suggested Citation

  • Levine, Paul L & Pearlman, Joseph G, 1994. "Credibility, Ambiguity and Asymmetric Information with Wage Stickiness," The Manchester School of Economic & Social Studies, University of Manchester, vol. 62(1), pages 21-39, March.
    • Handle: RePEc:bla:manch2:v:62:y:1994:i:1:p:21-39
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    Cited by:

    1. Faust, Jon & Svensson, Lars E O, 2001. "Transparency and Credibility: Monetary Policy with Unobservable Goals," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 42(2), pages 369-397, May.

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