Inherited Wage Dispersion and Optimal Discretion in a Dual-Rigidity TANK Model

Abstract

How does an inherited cross-type wage gap enter Markov-perfect discretionary monetary policy when transfers are passive? In a two-agent New Keynesian model with sticky prices and type-specific own-lag wage adjustment, the gap changes implementable allocations and the second-order welfare loss. A positive lower bound establishes its value relevance; explicit rank conditions characterize when current price inflation, wage inflation, and the output gap fail to determine the implementing nominal rate. An illustrative parameterization satisfies these conditions, although the additional state explains little nominal-rate variance after conditioning on all three aggregate variables. Welfare comparisons with fixed rules are driven mainly by aggregate wage-inflation stabilization and do not isolate the value of distributional information. Unrestricted targeted transfers separate aggregate allocation from the legacy wage-gap transition. In the CES-consistent distribution block, optimal smoothing eliminates consumption dispersion, improves on immediate wage-gap elimination, and coincides under discretion and date-0 commitment.