Trend inflation, the labor market wedge, and the non-vertical Phillips curve
Giovanni Di Bartolomeo (),
Patrizio Tirelli () and
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Recent developments in macroeconomics resurrect the view that welfare costs of inflation arise because the latter acts as a tax on money balances. Empirical contributions show that wage re-negotiations take place while expiring contracts are still in place. Bringing these seemingly unrelated aspects together in a stylized general equilibrium model, we find a disciplining effect of a positive inflation target on the wage markup and identify a long-term trade-off between inflation and output. This has important policy implications, ranging from the opportunity of revising the target in response to shocks, to the possibility of exploiting inflation as a tool to increase tax revenues via its employment- enhancing effect.
Keywords: trend inflation; long-run Phillips curve; inflation targeting; real money balances (search for similar items in EconPapers)
JEL-codes: E52 E58 E24 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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Journal Article: Trend inflation, the labor market wedge, and the non-vertical Phillips curve (2014)
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Persistent link: http://EconPapers.repec.org/RePEc:ter:wpaper:0081
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