JEL-Keywords: Monetary Policy, Unemployment, Inflation.
JEL-Classification: E24, E31, E52.

Considerations on Wage Policies for the Transmission Mechanism of Monetary

Does economic growth have speed limits beyond which inflation accelerates? With monetary policy rules à la Taylor or monetary targeting à la Bundesbank these limits are due to the fact that monetary policy feedback rules incorporate explicit growth targets beside inflation targets. When the growth target or “natural rate of unemployment” indicates excess demand, a central bank wishing to keep prices stable will rise interest rates and therefore reduce the incentive to invest. As a consequence the medium term target for growth is a self-fulfilling prophesy: as long as inflation is on target, it is impossible that the economy grows faster than the average. By contrast, if the central bank is to maximise output conditioned on maintaining price stability, investment could be stimulated via interest rate reduction as long as wage developments are in line with the inflation target of the central bank. This paper proposes a possible rule for the European Central Bank which does not take growth targets into account when setting interest rates but rather wage and income developments. This interest rate rule should be able to maintain price stability while stimulating growth and reducing the natural rate of unemployment.