Working Paper: NBER ID: w8690
Authors: Steinar Holden; John C. Driscoll
Abstract: Macroeconomists have for some time been aware that the New Keynesian Phillips curve, though highly popular in the literature, cannot explain the persistence observed in actual inflation. We argue that two of the more prominent alternative formulations, the Fuhrer and Moore (1995) relative contracting model and the Blanchard and Katz (1999) reservation wage conjecture, are highly problematic. Fuhrer and Moore (1995)'s formulation generates inflation persistence, but this is a consequence of their assuming that workers care about the past real wages of other workers. Making the more reasonable assumption that workers care about the current real wages of other workers, one obtains the standard formulation with no inflation persistence. The Blanchard and Katz conjecture turns out to imply that inflation depends negatively on itself lagged, i.e. the opposite of the empirical regularity.
Keywords: No keywords provided
JEL Codes: E31; E3; E5
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| type of wage concern (past vs. current) (J31) | inflation persistence (E31) |
| lagged inflation (E31) | current inflation (E31) |
| past wages (J31) | wage negotiations (J52) |
| wage negotiations (J52) | current inflation (E31) |
| inflation persistence (E31) | wage-setting behaviors (J31) |