Foreign Supply Shocks, Wage Indexation and Optimal Monetary Policy

Abstract

During the last two decades the major changes in the price of imported raw materials substantially affected the economic performance of OECD countries. Consequently, there has been extensive theoretical and political debate about the proper adjustment to these external shocks, and whether monetary policy should be accommodating in the event of rising energy prices.

An earlier version of this chapter was written together with Helmut Frisch. I wish to thank him for his most valuable comments. I am also indebted to Ulrike Freisleben for checking my calculations. I alone, however, retain full responsibility for any remaining errors.