Non-Keynesian stabilizers and inflation spirals

Abstract
When both prices and wages are subject to nominal frictions, an increase in input prices such as energy can trigger a wage-price spiral, as both nominal wages and prices adjust slowly. To analyze optimal policy in this environment, we consider a heterogeneous-agent model, with both wage and price stickiness. We derive joint optimal fiscal-monetary policy, using a rich set of fiscal tools, for both supply and demand shocks. We first identify the set of fiscal instruments that implements nominal price and wage stability as an optimal outcome. Starting from this equivalence result, we remove fiscal instruments to identify the most efficient one for restoring price and wage stability. A time-varying wage subsidy appears to be a powerful tool to stabilize inflation and activity over the business cycle. We call this policy a non-Keynesian stabilization policy because it does not operate directly through aggregate demand management. Finally, we compare the results with those obtained in the representative agent economy. Joint work with François Le Grand and Thomas Bourany.