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The Taylor principle is valid under wage stickiness

Author

Listed:
  • Blasselle Alexis

    (Laboratoire Jacques-Louis Lions, Université Pierre et Marie Curie (Paris VI), Boîte courrier 187, 75252 Paris Cedex 05, France)

  • Poissonnier Aurélien

    (Insee-DESE – Timbre G220, 15 bd Gabriel Péri, BP. 100, 92244 Malakoff Cedex, France, Phone: +33141177692, Fax: +33141176043 Crest-LMA, Malakoff, France; and École Polytechnique, Palaiseau, France)

Abstract

We consider the textbook neo-Keynesian model with staggered prices and wages in discrete time. We prove analytically that the Taylor principle holds in this case. When both contracts exhibit sluggish adjustment to market conditions, the policy maker faces a trade-off between stabilizing three welfare relevant variables: output, price inflation and wage inflation. We consider a monetary policy rule designed accordingly: the central banker can react to both inflations and the output gap. In addition to generalizing the Taylor principle we show that the frontier of determinacy embeds the frontier derived with staggered prices only, generalizes the frontier of determinacy in the limit case of continuous time and is symmetric in price and wage inflations.

Suggested Citation

  • Blasselle Alexis & Poissonnier Aurélien, 2016. "The Taylor principle is valid under wage stickiness," The B.E. Journal of Macroeconomics, De Gruyter, vol. 16(2), pages 581-596, June.
    • Handle: RePEc:bpj:bejmac:v:16:y:2016:i:2:p:581-596:n:2
    DOI: 10.1515/bejm-2014-0160
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    Cited by:

    1. Zhao, Junzhu, 2023. "Wealth in utility, the Taylor principle and determinacy," Journal of Macroeconomics, Elsevier, vol. 76(C).
    2. Jenny Chan, 2020. "Monetary Policy and Sentiment-Driven Fluctuations," Discussion Papers 2020, Centre for Macroeconomics (CFM).

    More about this item

    Keywords

    dynamic stochastic general equilibrium model; monetary policy rule; sun spot equilibria; taylor principle;
    All these keywords.

    JEL classification:

    • C62 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Existence and Stability Conditions of Equilibrium
    • C68 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computable General Equilibrium Models
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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