Asymmetric inflation expectations, downward rigidity of wages, and asymmetric business cycles

David Baqaee

Journal of Monetary Economics, 2020, vol. 114, issue C, 174-193

Abstract: Households’ inflation expectations are more responsive to inflationary news than to disinflationary news, and this asymmetry in expectations can cause downward wage rigidity. Asymmetric expectations imply that monetary policy can have asymmetric effects on employment and wages. I microfound asymmetric household expectations using ambiguity-aversion: households, who do not know the quality of their information, overweight inflationary news since it reduces their purchasing power, and underweight deflationary news since it increases their purchasing power. Although wages are downwardly rigid in this environment, monetary policy need not have a bias towards using inflation to grease the wheels of the labor market.

Keywords: Ambiguity aversion; Downward sticky wages; Asymmetric business cycles; Inflation expectations; Limited information (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (13)

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Related works:
Working Paper: Asymmetric Inflation Expectations, Downward Rigidity of Wages, and Asymmetric Business Cycles (2018)
Working Paper: Asymmetric inflation expectations, downward rigidity of wages,and asymmetric business cycles (2016)
Working Paper: Asymmetric Inflation Expectations, Downward Rigidity of Wages and Asymmetric Business Cycles (2015)
Working Paper: Asymmetric In?ation Expectations, Downward Rigidity of Wages,and Asymmetric Business Cycles (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:moneco:v:114:y:2020:i:c:p:174-193

DOI: 10.1016/j.jmoneco.2019.04.014

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