Long-term contracts, rational expectations and the optimal money supply rule
TL;DR: In this paper, a model with overlapping labor contracts with each labor contract being made for two periods was constructed, and the authors argued that monetary policy has the ability to affect the short run behavior of output, though it has no effects on long run output behavior.
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Abstract: The paper is concerned with the role of monetary policy and argues that activist monetary policy can affect the behavior of real output, rational expectations notwithstanding. A rational expectations model with overlapping labor contracts is constructed, with each labor contract being made for two periods. These contracts inject an element of short-run wage stickiness into the model. Because the money stock is changed by the monetary authority more frequently than labor contracts are renegotiated, and, given the assumed form of the labor contracts, monetary policy has the ability to affect the short-run behavior of output, though it has no effects on long-run output behavior.
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Citations
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References
The role of monetary policy
Milton Friedman
- 01 Jan 1995
TL;DR: There is wide agreement about the major goals of economic policy: high employment, stable prices, and rapid growth as discussed by the authors.There is less agreement that these goals are mutually compatible or, among those who regard them as incompatible, about the terms at which they can and should be substituted for one another.
Expectations and the neutrality of money
TL;DR: In this article, the authors provide a simple example of an economy in which equilibrium prices and quantities exhibit what may be the central feature of the modern business cycle: a systematic relation between the rate of change in nominal prices and the level of real output.
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The Relation Between Unemployment and the Rate of Change of Money Wage Rates in the United Kingdom, 1861–1957†
TL;DR: The relationship between unemployment and the rate of change of money wage rates is highly non-linear as discussed by the authors, and it is possible that one of the most important factors influencing the change in money wage rate is the level of unemployment.