Wage setting actors and sticky wages: Implications for the business cycle and optimal monetary policy

Abstract

Two sticky-wage models are introduced in this paper to examine the implications of having either households or firms as wage setting actors. The rate of wage inflation depends positively on the output gap if households set wages whereas such a relationship is of negative sign when firms set wages. Moreover, impulse–response functions and the statistical comparison with US data show different business cycle properties depending upon wage setting actors. Finally, optimal monetary policy is derived for each case, and compared with a Taylor-type monetary policy rule.