The central bank's task would be facilitated if wage setters
were to look through much of the spike in inflation resulting from the depreciation of the exchange rate.
"Sustained, heightened inflation expectations would be liable to adversely affect the behaviour of price and wage setters
, thereby increasing the risk of a very damaging price-wage spiral developing.
"The Committee is particularly concerned that current elevated inflation levels - primarily resulting from higher utility and food prices, as well as a markedly weaker pound - could lift expectations and thereby have significant second round effects through the behaviour of price and wage setters
We demonstrate that, since central bank independence reduces the mean inflation rate and its variance, wage setters
opt for a lower degree of nominal wage indexation leading to more wage and price inertia and, thus, to a flatter short-run Phillips curve.
The primary difference is that the model will be formulated in terms of price setters rather than wage setters
. The basic structure for this analysis can be found in Romer (1996, pp.
Gordon has called this apparent failure of wage setters
to index their contracts optimally the indexation puzzle.
The extent of the increase will depend very much on how the world economy evolves, on how the economy responds to the stimulus provided by the low exchange rate, and on the response of price and wage setters
to the near-term increase in the inflation rate," Dr Brash concluded.
This paper argues that the monetary regime may affect whether co-ordination among many wage setters
(1998), `The Non Neutrality of Monetary Policy with Large Price or Wage Setters
', mimeo, Harvard University.
The wage setters
target the natural rate of output growth (here normalized to zero) in their nominal wage contracts but cannot write state-contingent contracts.
and Fisher [1977!, private agents are wage setters
who sign nominal wage contracts prior to the start of period t based on their expectations on inflation in period t.
If they have a reputation for validation, then price and wage setters
will read more signal into a shock than if the authorities do not generally validate shocks.