Optimal Monetary Policy with Endogenous Contracts: Should We Return to a Commodity Standard?

40 Pages Posted: 11 May 2001

See all articles by Patrick Minford

Patrick Minford

Cardiff University Business School; Centre for Economic Policy Research (CEPR)

Eric Nowell

University of Liverpool Management School (ULMS) - Economics Division

Date Written: November 2000

Abstract

A representative agent who is employed chooses an optimal degree of wage indexation (to prices and the auction wage) in response to the monetary regime. Should that regime target the growth rate or the level of the money supply, or of prices (as in a commodity standard)? We find that, contrary to the usual finding from macroeconomic models with fixed wage contract structures, there are gains in welfare for the average household, with both real wages and employment being stabilized. The reason is that when the monetary regime shifts to targeting levels, indexation falls markedly; this flattens the aggregate supply curve and steepens the aggregate demand curve, providing a high degree of 'automatic' stabilization. The choice between targeting money or prices creates a trade-off between employment and real wage stability-implying a distributional conflict between insiders and outsiders in the labour market.

Keywords: Monetary rules, price level targeting, interest rate setting, inflation targeting

JEL Classification: E00, E50

Suggested Citation

Minford, Patrick and Nowell, Eric, Optimal Monetary Policy with Endogenous Contracts: Should We Return to a Commodity Standard? (November 2000). CEPR Discussion Paper No. 2616. Available at SSRN: https://ssrn.com/abstract=269669

Patrick Minford (Contact Author)

Cardiff University Business School ( email )

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Centre for Economic Policy Research (CEPR)

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United Kingdom

Eric Nowell

University of Liverpool Management School (ULMS) - Economics Division ( email )

Eleanor Rathbone Building
Bedford Street North
Liverpool L69 7ZA
United Kingdom
+44 15 1794 3058 (Phone)
+44 15 1794 3032 (Fax)

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