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<a target="_blank" rel="noopener" href="https://fatcat.wiki/container/hmxgj5sydrdl5fixutly3bi43y" style="color: black;">Journal of Monetary Economics</a>
We formulate an optimizing-agent model in which both labor and product markets exhibit monopolistic competition and staggered nominal contracts. The unconditional expectation of average household utility can be expressed in terms of the unconditional variances of the output gap, price inflation, and wage inflation. Monetary policy cannot replicate the Pareto-optimal equilibrium that would occur under completely flexible wages and prices; that is, the model exhibits a tradeoff between<span class="external-identifiers"> <a target="_blank" rel="external noopener noreferrer" href="https://doi.org/10.1016/s0304-3932(00)00028-3">doi:10.1016/s0304-3932(00)00028-3</a> <a target="_blank" rel="external noopener" href="https://fatcat.wiki/release/oi3fj6tybnavbaedakcylfelvy">fatcat:oi3fj6tybnavbaedakcylfelvy</a> </span>
more »... the output gap, price inflation, and wage inflation. The Pareto optimum is only attainable if either wages or prices are completely flexible. For reasonable calibrations of the model, we characterize the optimal policy rule. Furthermore, strict price inflation targeting is clearly suboptimal, whereas rules that place substantial weight on the output gap as well as price inflation are nearly optimal. for useful discussions; and Carolina Marquez for valuable research assistance. We have benefitted from suggestions made by an anonymous referee and by Robert King. We particularly appreciate the recent contributions of Julio Rotemberg and Michael Woodford, who not only have performed path breaking welfare analysis of monetary policy, but also have developed intuitively appealing explanations of their results and have made substantial efforts to provide the details of their derivations. The views in this paper are solely the responsibility of the authors and should not be interpreted as reflecting the views of the Board of Governors of the Federal Reserve System or of any other person associated with the Federal Reserve System. The email addresses of the authors are firstname.lastname@example.org, email@example.com, and firstname.lastname@example.org, respectively.
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