In this paper we analyze nominal income targeting when wages can be indexed to the price level. This combination of a contemporaneous nominal income targeting policy rule with optimal wage indexing provides the optimal monetary response to both demand and supply shocks, and achieves the full information output level in each period regardless of the elasticity of labor supply. Thus earlier results on the desirable features of nominal income targeting are extended and strengthened when nominal wages are indexed to the price level. We also demonstrate that nominal income targeting dominates money targeting in an overlapping contract model in which all agents condition on lagged information if the elasticity of labor supply is less that unity.
https://doi.org/10.20955/wp.1989.005
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