Sticky Wages, Incomplete Pass-Through and Inflation Targeting: What is the Right Index to Target?

Abo-Zaid, Salem (2009): Sticky Wages, Incomplete Pass-Through and Inflation Targeting: What is the Right Index to Target?

Abstract

This paper studies monetary policy rules in a small open economy with Inflation Targeting, incomplete pass-through and rigid nominal wages. The paper shows that, when nominal wages are fully flexible and pass-through is low to moderate, the monetary authority should target the consumer price index (CPI) rather than the Domestic Price Index (DPI). When pass-through is high, an economy with high degrees of nominal wage rigidity and wage indexation should either target the CPI or fully stabilize nominal wages. The results of the paper suggest that, by committing to a common monetary policy in a common-currency area, some countries may not be following the right monetary policy rules.

• Item Type: MPRA Paper
• Language: English
• Keywords: Monetary Policy Rules, Incomplete Pass-Through, Sticky Wages, Inflation Targeting, Conumer Price Index, Domestic Price Index
• Subjects: E - Macroeconomics and Monetary Economics > E1 - General Aggregative Models > E12 - Keynes ; Keynesian ; Post-Keynesian; E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E31 - Price Level ; Inflation ; Deflation; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E52 - Monetary Policy; E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates; F - International Economics > F3 - International Finance > F31 - Foreign Exchange

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