Working Paper: NBER ID: w8614
Authors: N. Gregory Mankiw; Ricardo Reis
Abstract: This paper explores a model of wage adjustment based on the assumption that information disseminates slowly throughout the population of wage setters. This informational frictional yields interesting and plausible dynamics for employment and inflation in response to exogenous movements in monetary policy and productivity. In this model, disinflations and productivity slowdowns have a parallel effect: They both cause the path of employment to fall below the level that would prevail under full information. The model implies that, in the face of productivity change, a policy of targeting either nominal income or the nominal wage leads to more stable employment than does a policy of targeting the price of goods and services. Finally, we examine U.S. time series and find that, as the model predicts, unemployment fluctuations are associated with both inflation and productivity surprises.
Keywords: No keywords provided
JEL Codes: E0; E3; E5
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| disinflations (E31) | employment (J68) |
| productivity slowdowns (O49) | employment (J68) |
| monetary policy changes (E52) | inflation (E31) |
| strict inflation targeting (E31) | employment stability (J63) |
| stabilizing nominal income or wages (E64) | employment outcomes (J68) |
| unemployment fluctuations (J64) | inflation (E31) |
| unemployment fluctuations (J64) | productivity surprises (O49) |
| productivity surprises (O49) | unemployment (J64) |