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Does Wage-Inflation Targeting Complement Foreign Exchange Intervention? An Evaluation Of A Multi-Target, Two-Instrument Monetary Policy Framework, Taojun Xie, Jingting Liu, Joseph D. Alba, Wai-Mun Chia

Research Collection Lee Kong Chian School Of Business

We assess the inclusion of wage inflation as an intermediate target of an emerging central bank using a dynamic stochastic general equilibrium model with sticky wages and prices calibrated for the South Korean economy. The model includes wage inflation as an additional target jointly with domestic price inflation and the output gap in a Taylor- type interest rate rule operating with a sterilized foreign exchange (FX) intervention rule. Our results show a complementary relationship between wage inflation targeting and price inflation targeting. That is, by supplementing price inflation targeting with wage inflation targeting, welfare improves for cases with and without …