We show analytically that ensuring stable nominal wage growth is optimal monetary policy in a multisector economy with fixed menu costs for adjusting goods prices, even when wages are completely flexible. This nominal wage targeting contrasts with inflation targeting, the optimal policy prescribed by the textbook New Keynesian model in which firms can only randomly adjust their prices. Menu costs, unlike the conventional model, induce state-dependent pricing and are less tractable to work with. We build an analytical model to show that optimal monetary policy is exactly nominal wage targeting for shocks that are not too small, and approximately so otherwise.
Data, data, data… Economists know their importance well, especially when it comes to monitoring macroeconomic conditions - the basis for making informed economic and policy decisions. Handling large and complex data sets was a challenge that macroeconomists engaged in real-time analysis faced long before so-called big data became pervasive in other disciplines. We review how methods for tracking economic conditions using big data have evolved over time and explain how econometric techniques have advanced to mimic and automate best practices of forecasters on trading desks, at central banks, and in other market-monitoring roles. We present in detail the methodology underlying the New York Fed Staff Nowcast, which employs these innovative techniques to produce early estimates of GDP growth, synthesizing a wide range of macroeconomic data as they become available.