Stanley Fischer's model Essay Example | Topics and Well Written Essays - 1000 words

Stanley Fischers model - Essay Example(Taylor) Implicit wage contracts is when workers ar risk averse and employers ar non, an implicit contract may be made with an understanding over compromise basic ease up and hours. This may or may not generate nominal wage rigidity. Contracts like this may be non-implementable if there is asymmetric information. The Policy Ineffectiveness Proposition (PIP) is the idea in new classical political economy that rational expectations implies that government policy can realise no impact on realistic scotch variables. (Wikipedia) Policy ineffectiveness proposition is a monetary policy which is an output stabilizer. It does not affect the real flow of output but rather, affects and stabilizes the economy. It implies that in a place where the population has rational expectations, government policies which ar made to influence the economy into a level of production will never be effective. callable to the flexibility of the price and wages, ch anges will be call ind and adjusted on implemented policies thus it does not affect aggregate policies. Policy implications during this economic stage are government should not do some(prenominal) activist policy because government should know the publics expectation and public will also try to anticipate governments expectation about the public.Just before the new Keynesian model was formulated, it was believed that the formulation of government policies does not have any direct effect on wages and prices in the market unless a surprise monetary policy was released and discloses the economic status in a short wile. It was also believed that wages and prices are in all flexible and would directly adjust to the expected price levels unless otherwise, unanticipated changes occurs which affects cumulative outputs. Arratibel and Thomas states in the consequences of staggered wage setting for the credibility of monetary policy that In contrast with the New-Keynesian theory, new class ical economists make out that credibility problems are central to the disinflationary process, so that disinflation would be costless if the government announced credible commitments. But, if multi-period contracts start to more lasting effects of monetary policy surprises, they will enhance the credibility (time consistency) problem of monetary policy. (1)Fischer started to investigate monetary policies focusing the wage and price rigidity of which, it was believed that the formulation of government policies does not have any direct effect on wages and prices in the market unless a surprise monetary policy was released and discloses the economic status in a short wile. It was also believed that wages and prices are completely flexible and would directly adjust to the expected price levels unless otherwise, unanticipated changes occurs which affects cumulative outputs. Due to the flexibility of the price and wages, changes will be anticipated and adjusted on implemented policies t hus it does not affect aggregated policies. Stanley Fischers model of