### Abstract

We construct an optimizing-agent model of a closed economy which is simple enough that we can use it to make exact utility calculations. There is a stabilization problem because there are one-period nominal contracts for wages, or prices, or both and shocks that are unknown at the time when contracts are signed. We evaluate alternative monetary policy rules using the utility function of the representative agent. Fully optimal policy can attain the Pareto-optimal equilibrium. Fully optimal policy is contrasted with both 'naive' and 'sophisticated' simple rules that involve, respectively, complete stabilization and optimal stabilization of one variable or a combination of two variables. With wage contracts, outcomes depend crucially on whether there are also price contracts. For example, if labor supply is relatively inelastic, for productivity shocks, nominal income stabilization yields higher welfare when there are no price contracts. However, with price contracts, outcomes are independent of whether there are wage contracts, except, of course, for nominal wage outcomes.

Original language | English |
---|---|

Pages (from-to) | 507-535 |

Number of pages | 29 |

Journal | International Tax and Public Finance |

Volume | 6 |

Issue number | 4 |

Publication status | Published - 1999 Dec 1 |

Externally published | Yes |

### Fingerprint

### Keywords

- Monetary policy
- Price contracts
- Stabilization
- Sticky prices
- Sticky wages
- Wage contracts

### ASJC Scopus subject areas

- Finance
- Accounting
- Economics and Econometrics

### Cite this

*International Tax and Public Finance*,

*6*(4), 507-535.

**Exact Utilities under Alternative Monetary Rules in a Simple Macro Model with Optimizing Agents.** / Henderson, Dale W.; Kim, Jinill.

Research output: Contribution to journal › Article

*International Tax and Public Finance*, vol. 6, no. 4, pp. 507-535.

}

TY - JOUR

T1 - Exact Utilities under Alternative Monetary Rules in a Simple Macro Model with Optimizing Agents

AU - Henderson, Dale W.

AU - Kim, Jinill

PY - 1999/12/1

Y1 - 1999/12/1

N2 - We construct an optimizing-agent model of a closed economy which is simple enough that we can use it to make exact utility calculations. There is a stabilization problem because there are one-period nominal contracts for wages, or prices, or both and shocks that are unknown at the time when contracts are signed. We evaluate alternative monetary policy rules using the utility function of the representative agent. Fully optimal policy can attain the Pareto-optimal equilibrium. Fully optimal policy is contrasted with both 'naive' and 'sophisticated' simple rules that involve, respectively, complete stabilization and optimal stabilization of one variable or a combination of two variables. With wage contracts, outcomes depend crucially on whether there are also price contracts. For example, if labor supply is relatively inelastic, for productivity shocks, nominal income stabilization yields higher welfare when there are no price contracts. However, with price contracts, outcomes are independent of whether there are wage contracts, except, of course, for nominal wage outcomes.

AB - We construct an optimizing-agent model of a closed economy which is simple enough that we can use it to make exact utility calculations. There is a stabilization problem because there are one-period nominal contracts for wages, or prices, or both and shocks that are unknown at the time when contracts are signed. We evaluate alternative monetary policy rules using the utility function of the representative agent. Fully optimal policy can attain the Pareto-optimal equilibrium. Fully optimal policy is contrasted with both 'naive' and 'sophisticated' simple rules that involve, respectively, complete stabilization and optimal stabilization of one variable or a combination of two variables. With wage contracts, outcomes depend crucially on whether there are also price contracts. For example, if labor supply is relatively inelastic, for productivity shocks, nominal income stabilization yields higher welfare when there are no price contracts. However, with price contracts, outcomes are independent of whether there are wage contracts, except, of course, for nominal wage outcomes.

KW - Monetary policy

KW - Price contracts

KW - Stabilization

KW - Sticky prices

KW - Sticky wages

KW - Wage contracts

UR - http://www.scopus.com/inward/record.url?scp=0037798008&partnerID=8YFLogxK

UR - http://www.scopus.com/inward/citedby.url?scp=0037798008&partnerID=8YFLogxK

M3 - Article

VL - 6

SP - 507

EP - 535

JO - International Tax and Public Finance

JF - International Tax and Public Finance

SN - 0927-5940

IS - 4

ER -