Solving Re Models with Discontinuous Policy Rules: An Application to Minimum Wage Setting in Germany

17 Pages Posted: 5 Oct 2016

Date Written: 2016

Abstract

The legal regulations require the minimum wage in Germany to be adjusted biennially which gives rise to a policy discontinuity. From the perspective of rational expectations models, such policy features render standard local approximation techniques infeasible. The paper presents a stylised model in which negotiated wages and corporate profits are the outcome of an optimisation problem, while changes to the minimum wage are modelled by a discontinuous policy rule. Using the simple example of minimum wage setting in Germany, the paper illustrates how such models can be solved using the method of undetermined coefficients and presents selected simulation results.

Keywords: rational expectations model, discontinuous policy rule, method of undetermined coefficients

JEL Classification: E1, E6

Suggested Citation

Bursian, Dirk, Solving Re Models with Discontinuous Policy Rules: An Application to Minimum Wage Setting in Germany (2016). Bundesbank Discussion Paper No. 35/2016, Available at SSRN: https://ssrn.com/abstract=2848048 or http://dx.doi.org/10.2139/ssrn.2848048

Dirk Bursian (Contact Author)

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

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