Trend Inflation, Wage and Price Rigidities, and Welfare

Robert Amano, Kevin Moran, Stephen Murchison and Andrew Rennison

Cahiers de recherche from CIRPEE

Abstract: This paper studies the steady-state costs of inflation in a general-equilibrium model with real per capita output growth and staggered nominal price and wage contracts. Our analysis shows that trend inflation has important effects on the economy when combined with nominal contracts and real output growth. Steady-state output and welfare losses are quantitatively important even for low values of trend inflation. Further, we show that nominal wage contracting is quantitatively more important than nominal price contracting in generating these losses. This important result does not arise from price dispersion per se but from an effect of nominal output growth on the optimal markup of monopolistically competitive labour suppliers. We also demonstrate that accounting for productivity growth is important for calculating the welfare costs of inflation. Indeed, the presence of two percent productivity growth increases the welfare costs of inflation in our benchmark specification by a factor of four relative to the no-growth case.

Keywords: Inflation; costs and benefits; wage and price rigidities (search for similar items in EconPapers)
JEL-codes: E0 E5 (search for similar items in EconPapers)
Date: 2007
New Economics Papers: this item is included in nep-cba, nep-dge and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Working Paper: Trend Inflation, Wage and Price Rigidities, and Welfare (2007)
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Persistent link: https://EconPapers.repec.org/RePEc:lvl:lacicr:0720

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