Work

How Monetary Policy can have Permanent Real Effects with Only Temporary Nominal Rigidity

Year: 2001

Type: article

Abstract: A macroeconomic model is developed in which the psychological concept of loss aversion is incorporated into workers’ preferences. The impact of monetary policy in the presence of loss aversion depends on the specification of the reference wage. The plausible specification that a worker’s reference wage is the real wage she was paid in the previous period is considered in detail. Specifying the reference wage in this way, we show that an unanticipated change in monetary policy has a permanent, real effect when short term labour contracts are written in nominal wages.

Source: Scottish Journal of Political Economy

DOI: 10.1111/1467-9485.00213

Authors: Ian M. McDonald, Hugh Scully

Institutions: The University of Melbourne, University of Tasmania

Language: English

Topic: Monetary Policy and Economic Impact

Subfield: General Economics, Econometrics and Finance

Field: Economics, Econometrics and Finance

Domain: Social Sciences

SDG: Decent work and economic growth

Open Access status: green

Funder: Australian Research Council