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A NOTE ON INFLATION PERSISTENCE IN A FAIR WAGE MODEL OF THE BUSINESS CYCLE

David de la Croix (), Grégory de Walque () and Raf Wouters ()

Macroeconomic Dynamics, 2009, vol. 13, issue 5, 673-684

Abstract: We generalize existing fair wage models to allow effort to vary over the business cycle. When effort is variable, wage fluctuations are partially compensated for by endogenous effort fluctuations, so that the sensitivity of marginal cost to output and employment variations is decreased. This new mechanism decreases the need for sluggishness to explain the observed high inflation persistence.

Date: 2009
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Working Paper: Dynamics and monetary policy in a fair wage model of the business cycle (2006) Downloads
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