How Monetary Policy can have Permanent Real Effects with only Temporary Nominal Rigidity
نویسندگان
چکیده
A macroeconomic model is developed in which the psychological concept of loss aversion is incorporated into agents’ preferences. The impact of monetary policy in the presence of loss aversion depends on the specification of the reference wage. The plausible specification that a worker’s reference wage is the real wage she was paid in the previous period is considered in detail. We show that an unanticipated change in monetary policy has a permanent, real effect when short term labour contracts are written in nominal wages.
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