In this paper I analyze the co-variation of the fiscal deficit and inflation in a simple perfect foresight model that incorporates low- and high-wage cycles of equal depth and duration. When money and consumption are not extremely strong complements and the wage-cycle not extremely short-lived, inflation rises above its pre-stabilization level while the deficit is lower. The results thus argue that public sector wage cycles may underlie the weak empirical correlation of the deficit and inflation.
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Volume (Year): 31 (1999) Issue (Month): 4 (November) Pages: 785-810 Download reference. The following formats are available: HTML
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