Optimal stabilization policy when wages and prices are sticky
Subtitle: the case of a distorted steady state
By: Pierpaolo Benigno, Michael Woodford.
Contributors: Woodford, Michael, Professor.; National Bureau of Economic Research.
Series: NBER working paper series ;; working paper 10839; Working paper series (National Bureau of Economic Research : Online) ;; working paper no. 10839.
Publisher: National Bureau of Economic Research
Published: 2004
Place of publication: Cambridge, MA
Language: eng
Format: Electronic resource
Subjects: Economic stabilization.; Economic policy.
Description: "Erceg et al.  (2000) show that when both wages and prices are sticky, maximization of expected utility is equivalent to minimizing a loss function with three terms, involving measures of the variability of wage inflation, price inflation and the output gap respectively.  Here we generalize their analysis, most importantly by not assuming the existence of output and employment subsidies that eliminate the distortions resulting from market power in goods and labor markets, so that the equilibrium level of output under flexible wages and prices would not necessarily be optimal.  We show that a quadratic loss function can still be justified that involves the same three terms, albeit with different relative weights and a different definition of the output gap.  Many conclusions of Erceg et al.  are thus found to apply more generally.  However, we argue that in the presence of significant steady-state distortions, simple rules of the kind that they examine are likely to approximate optimal policy less closely than is suggested by their numerical results"--National Bureau of Economic Research web site.
Notes: Includes bibliographical references.
Title from PDF file as viewed on 1/6/2005.
Also available in print.
System requirements: Adobe Acrobat Reader.
Mode of access: World Wide Web.