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Trend inflation, the labor market wedge, and the non-vertical Phillips curve

Giovanni Di Bartolomeo (), Patrizio Tirelli () and Nicola Acocella

Journal of Policy Modeling, 2014, vol. 36, issue 6, 1022-1035

Abstract: 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)
Date: 2014
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Working Paper: Trend inflation, the labor market wedge, and the non-vertical Phillips curve (2011) Downloads
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