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Fairness and the disinflation puzzle

Andre Lunardelli

No 2014-32, Economics Discussion Papers from Kiel Institute for the World Economy (IfW)

Abstract: Following Driscoll and Holden (2004), I model forward-looking workers who consider it unfair if a wage adjustment fails to match past inflation. However, the present paper proposes a much larger effect by using the job finding rate as the measure of workers' opportunities outside the firm rather than the unemployment rate, develops a dynamic model with imperfect monitoring, and simulates a credible gradual disinflation with a large sacrifice ratio. It also uses the model to discuss real adverse shocks, the manner in which indexation is used in New Keynesian models, and the use of sticky information to explain disinflation costs.

Keywords: inflation persistence; reciprocity; indexation; Phillips curve; coordination failure; asymmetric effects of monetary policy (search for similar items in EconPapers)
JEL-codes: D03 E31 E32 E42 E50 J64 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba and nep-mac
Date: 2014
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