Asymmetric Inflation Expectations, Downward Rigidity of Wages, and Asymmetric Business Cycles

David Baqaee

No 12906, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: This paper shows that household expectations of the inflation rate are more responsive to inflationary news than to disinflationary news. This asymmetry in inflation expectations can be a source of downward nominal wage rigidity, since workers expectations adjust more quickly to inflationary shocks than disinflationary shocks. I embed asymmetric beliefs into a general equilibrium model and show that, in such a model, monetary policy has asymmetric effects on employment, output, and wage inflation consistent with the data. 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.

Date: 2018-05
New Economics Papers: this item is included in nep-dge, nep-mac and nep-mon
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Related works:
Journal Article: Asymmetric inflation expectations, downward rigidity of wages, and asymmetric business cycles (2020)
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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