Revisiting the Delegation Problem in a Sticky Price and Wage Economy

In a stylized Neo-Keynesian model with Calvo-type price and wage stickiness, this paper evaluates the usefulness of delegating price level and nominal wage targets to a discretionary central bank when the monetary policy objectives are summarized by a utility-based loss function. Despite its ability to engender policy inertia, price level targeting is often dominated by inflation targeting when defined over a combination of goods-price and nominal wage inflation. Alternatively, a suitably designed wage target has desirable stabilization properties that reduce the cost of policy tradeoffs. For a number of different parameter configurations, wage targeting strictly dominates price level and inflation targeting. On a final note, the results indicate that a dual policy involving separate price and wage targets nearly replicates the optimal equilibrium dynamics induced by minimization of the welfare-relevant loss function under commitment from a timeless perspective.