Wage setting actors, sticky wages, and optimal monetary policy

Abstract

Following Erceg et al. (2000), sticky wages are generally modelled assuming that households set wage contracts à la Calvo (1983). This paper compares that sticky-wage model with one where wage contracts are set by firms, assuming flexible prices in any case. The key variable for wage dynamics moves from the marginal rate of substitution (households set wages) to the marginal product of labor (firms set wages). Optimal monetary policy in both cases fully stabilizes wage inflation and the output gap after technology or preference innovations. However, nominal shocks make the assumption on who set wages relevant for optimal monetary policy.