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Nominal Contracting and Monetary Targets -- Drifting into Indexation

Author

Listed:
  • Patrick Minford

    (Cardiff University and CEPR)

  • Eric Nowell

    (University of Liverpool)

  • Bruce Webb

    (Cardiff University)

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. Copyright Royal Economic Society 2003.

Suggested Citation

  • Patrick Minford & Eric Nowell & Bruce Webb, 2003. "Nominal Contracting and Monetary Targets -- Drifting into Indexation," Economic Journal, Royal Economic Society, vol. 113(484), pages 65-100, January.
    • Handle: RePEc:ecj:econjl:v:113:y:2003:i:484:p:65-100
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    References listed on IDEAS

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    Cited by:

    1. Steve Ambler, 2009. "Price‐Level Targeting And Stabilisation Policy: A Survey," Journal of Economic Surveys, Wiley Blackwell, vol. 23(5), pages 974-997, December.
    2. Hatcher, Michael, 2014. "Indexed versus nominal government debt under inflation and price-level targeting," Journal of Economic Dynamics and Control, Elsevier, vol. 45(C), pages 126-145.
    3. Hatcher, Michael C., 2011. "Comparing inflation and price-level targeting: A comprehensive review of the literature," Cardiff Economics Working Papers E2011/22, Cardiff University, Cardiff Business School, Economics Section.
    4. Minford, Patrick & Matthews, Kent & Webb, Bruce & Meenagh, David, 2006. "Monetary Regimes: Is There a Trade-Off Between Consumption and Employment Variability?," CEPR Discussion Papers 5609, C.E.P.R. Discussion Papers.
    5. Minford, Patrick & Le, Vo Phuong Mai, 2007. "Optimising Indexation Arrangements under Calvo Contracts and their Implications for Monetary Policy," CEPR Discussion Papers 6325, C.E.P.R. Discussion Papers.
    6. Carrillo, Julio A. & Peersman, Gert & Wauters, Joris, 2022. "Endogenous wage indexation and aggregate shocks," Journal of Macroeconomics, Elsevier, vol. 72(C).
    7. Vo Le & Patrick Minford, 2006. "Joining the European Monetary Union—Comparing First and Second Generation Open Economy Models," Open Economies Review, Springer, vol. 17(3), pages 281-296, July.
    8. Minford, Patrick & Le, Vo Phuong Mai, 2006. "Calvo Contracts - Optimal Indexation in General Equilibrium," CEPR Discussion Papers 5616, C.E.P.R. Discussion Papers.
    9. Steve Ambler, 2009. "Is It Time For Price‐Level Targeting?," Economic Affairs, Wiley Blackwell, vol. 29(3), pages 35-39, September.
    10. Minford, Patrick & Nowell, Eric & Webb, Bruce, 2005. "Would price-level targeting destabilise the economy?," Cardiff Economics Working Papers E2005/12, Cardiff University, Cardiff Business School, Economics Section.
    11. Patrick Minford & David Peel, 2003. "Optimal monetary policy: is price‐level targeting the next step?," Scottish Journal of Political Economy, Scottish Economic Society, vol. 50(5), pages 650-667, November.

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