Monetary Policy and the Informational Implications of the Phillips Curve

In this paper I examine optimal monetary policy and the informational implications of the Phillips curve in a stochastic macroeconomic model. It is assumed that wages are not only indexed to the price level, but respond to the state of the labour market as well. If information about current disturbances is conveyed only through market prices, it turns out that wages have independent informational content, over and above the informational content of other aggregate prices. The optimal policy in this model implies reactions to changes in both wages and the aggregate price level, as, unlike the commonly used model of Gray and Fischer, wages and prices are only partially correlated signals about the unobserved disturbances. The paper also discusses an extension to an open economy and the relation between exchange rate policy and wages.