Employment, Inflation and Income Distribution in an Open Economy. Pricing-to-market in a Modified NAIRU Model

Stefan Ederer

No 360, WIFO Working Papers from WIFO

Abstract: The paper modifies a standard NAIRU model by implementing "pricing-to-market" as the basic assumption for the price setting behaviour of firms in an open economy. This entirely changes the outcomes of the model: First, inflation in equilibrium is stable at any rate of unemployment; the long-run Phillips curve is horizontal. Second, income distribution varies with the level of employment. Third, supplemented with a demand equation which allows for effects of both income distribution and international competitiveness, the NAIRU ceases to be a "strong attractor". These characteristics to a certain extent open up the space for expansive wage and demand policies.

Keywords: Demand; Distribution; Inflation; NAIRU; Wages (search for similar items in EconPapers)
Pages: 25 pages
Date: 2010-02
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Persistent link: https://EconPapers.repec.org/RePEc:wfo:wpaper:y:2010:i:360

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