Working Paper: CEPR ID: DP12906
Authors: David Rezza Baqaee
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.
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JEL Codes: No JEL codes provided
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| household inflation expectations (D19) | downward nominal wage rigidity (J31) |
| positive monetary shocks (E39) | higher wage inflation (J39) |
| positive monetary shocks (E39) | smaller output booms (Q33) |
| negative monetary shocks (E39) | little wage disinflation (J31) |
| negative monetary shocks (E39) | larger output drops (E39) |
| household inflation expectations (D19) | responsiveness to inflationary news (E31) |
| household inflation expectations (D19) | responsiveness to disinflationary news (E31) |