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Inflation and the Dispersion of Real Wages

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Author Info
Alok Kumar

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Abstract

The effects of inflation on real wage dispersion and welfare are studied in a cash-in-advance economy with a Walrasian goods market but a labor market with search friction. In the labor market, firms post wages and both employed and unemployed workers search among the posted wages. In equilibrium, a higher inflation rate reduces the dispersion in real wages. This result is consistent with both the observed trends in wage dispersion and the inflation rate witnessed in the 1980's and the 1990's in the U.S. and the empirical literature linking reduced inflation to greater wage dispersion. While higher inflation always lowers consumption, output, and employment, the optimal inflation rate exceeds the Friedman ru

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Paper provided by Econometric Society in its series Econometric Society 2004 Far Eastern Meetings with number 750.

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Date of creation: 11 Aug 2004
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Handle: RePEc:ecm:feam04:750

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Related research
Keywords: Inflation Wage Posting Search Dispersion of Real

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Find related papers by JEL classification:
E0 - Macroeconomics and Monetary Economics - - General
E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
N3 - Economic History - - Labor and Consumers, Demography, Education, Income, and Wealth

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References listed on IDEAS
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    Other versions:
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    Other versions:
  5. Chatterjee, Satyajit & Corbae, Dean, 1992. "Endogenous Market Participation and the General Equilibrium Value of Money," Journal of Political Economy, University of Chicago Press, vol. 100(3), pages 615-46, June. [Downloadable!] (restricted)
    Other versions:
  6. Allen Head & Alok Kumar, 2005. "Price Dispersion, Inflation, And Welfare," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 46(2), pages 533-572, 05. [Downloadable!] (restricted)
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    Other versions:
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    Other versions:
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  21. Merz, Monika, 1995. "Search in the labor market and the real business cycle," Journal of Monetary Economics, Elsevier, vol. 36(2), pages 269-300, November. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Alok Kumar, 2008. "Capital Tax, Minimum Wage, and Labor Market Outcomes," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 11(1), pages 133-154, January. [Downloadable!] (restricted)
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