Perhaps I am missing some fatal flaw, but I have found econoblogger KNZN's arguments in favour of central banks targeting unit labour costs quite persuasive. It has the advantage over inflation targets of excluding exogenous shocks. It also forces the monetary authorities to take more account of productivity. Here is the nub of KZNZ's arguments:
The main purpose of this approach is to have a simple and easily understood (by the market) answer to the question of how to react to supply shocks. The appropriate response to supply shocks is a matter of great controversy in macroeconomics: should a central bank accommodate supply shocks and let the inflation rate rise temporarily in order to avoid a recession or a slowing of growth (or a boom, in the case of a favorable supply shock), or should it lean heavily against the inflationary impact (or the deflationary impact) of supply shocks in order to pursue an unchanged target inflation rate? The labor cost target settles the question: if the shock is to domestic productivity or to the labor market, then lean against the inflationary impact; if the shock is entirely outside the domestic labor market and production process, then accommodate (except to the extent that you expect the shock to have indirect effects on productivity and the labor market, such as might arise, for example, from sticky real wages).
The main arguments against this approach I can think of are:
1) the objection that this would put undue focus on wage bargaining
2) estimates of unit labour costs are subject to considerable revision - unlike the CPI.
Mark Thoma's post is, as always, worth reading. Your views welcome.
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