Stylised models of the policy game between monetary policy makers and the private sector have suggested that discretionary policy regimes suffer from an inherent inflationary bias and that precommitment to a target rate of inflation may be desirable. This paper shows that in the presence of...

This paper examines the dynamic implications of a shift in relative prices between traded and non-traded goods. In accordance with empirical evidence we allow for sluggish wage adjustment and the presence of increasing returns to scale in the traded goods sector. The existence of increasing...