Advanced Search
MyIDEAS: Login

Firm-specific labor, trend inflation, and equilibrium stability

Contents:

Author Info

  • Takushi Kurozumi
  • Willem Van Zandweghe

Abstract

The present paper explores the implications for monetary policy of different labor market structures. In one labor market workers are identical and thus easily interchangeable between firms, while in another labor market workers are specialized to fill the needs of specific firms. The labor market structure turns out to be a crucial determinant of the effectiveness of monetary policies guided by the Taylor principle in an environment of high trend inflation. ; According to the Taylor principle, an undesirable rise in inflation requires a disproportionately strong response of interest rates. Otherwise, self-fulfilling private-sector expectations of inflation may push prices upward. It is widely believed that the Federal Reserve’s approach to setting interest rates did not conform to the Taylor principle prior to the early 1980s, but since then has done so, to good effect. Recent research, however, has suggested that when trend inflation is high—about four percent or higher—the Taylor principle may become less effective. ; Studies on the subject have made varying assumptions about the structure of the labor market, with some presuming that all firms hire the same type of labor, while others assume that firms need specialized labor. These differing assumptions matter: the need for specialized labor affects the way firms’ costs adjust in reaction to shifts in demand, and that has implications for inflation dynamics and for the Taylor principle. ; We find that in a model economy with specialized labor, a policy rule for setting interest rates cannot ensure keeping inflation stable even if it satisfies the Taylor principle, if trend inflation is high. This differs from a model where workers are identical, in which adhering to the Taylor principle does achieve stability of inflation, whether trend inflation is high or low. The finding suggests that whether the Federal Reserve’s policy shift in the early 1980s was sufficient, alone, to bring about the period of stable inflation that followed, or whether it also depended on a decline in trend inflation, depends on the structure of the labor market.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.kansascityfed.org/publicat/reswkpap/pdf/rwp12-09.pdf
Download Restriction: no

Bibliographic Info

Paper provided by Federal Reserve Bank of Kansas City in its series Research Working Paper with number RWP 12-09.

as in new window
Length:
Date of creation: 2012
Date of revision:
Handle: RePEc:fip:fedkrw:rwp12-09

Contact details of provider:
Postal: 1 Memorial Drive, Kansas City, MO 64198-0001
Phone: (816) 881-2254
Web page: http://www.kansascityfed.org/
More information through EDIRC

Order Information:
Email:

Related research

Keywords:

This paper has been announced in the following NEP Reports:

References

References listed on IDEAS
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.:
as in new window
  1. Kobayashi, Teruyoshi & Muto, Ichiro, 2010. "A note on expectational stability under non-zero trend inflation," MPRA Paper 22952, University Library of Munich, Germany.
  2. Guido Ascari & Nicola Branzoli & Efrem Castelnuovo, 2011. "Trend Inflation, Wage Indexation, and Determinacy in the U.S," Quaderni di Dipartimento 153, University of Pavia, Department of Economics and Quantitative Methods.
  3. Romer, David, 1990. "Staggered price setting with endogenous frequency of adjustment," Economics Letters, Elsevier, vol. 32(3), pages 205-210, March.
  4. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
  5. Richard Clarida & Jordi Galí & Mark Gertler, 2000. "Monetary Policy Rules And Macroeconomic Stability: Evidence And Some Theory," The Quarterly Journal of Economics, MIT Press, vol. 115(1), pages 147-180, February.
  6. Guido Ascari & Tiziano Ropele, 2009. "Trend Inflation, Taylor Principle and Indeterminacy," Quaderni di Dipartimento 097, University of Pavia, Department of Economics and Quantitative Methods.
  7. Devereux, Michael B. & Yetman, James, 2002. "Menu costs and the long-run output-inflation trade-off," Economics Letters, Elsevier, vol. 76(1), pages 95-100, June.
  8. Eichenbaum, Martin & Fisher, Jonas D.M., 2007. "Estimating the frequency of price re-optimization in Calvo-style models," Journal of Monetary Economics, Elsevier, vol. 54(7), pages 2032-2047, October.
  9. Sveen, Tommy & Weinke, Lutz, 2005. "New perspectives on capital, sticky prices, and the Taylor principle," Journal of Economic Theory, Elsevier, vol. 123(1), pages 21-39, July.
  10. Kaushik Mitra & James Bullard, . "Learning About Monetary Policy Rules," Discussion Papers 00/41, Department of Economics, University of York.
  11. Yuriy Gorodnichenko & Olivier Coibion, 2009. "Monetary Policy, Trend Inflation and the Great Moderation: An Alternative Interpretation," 2009 Meeting Papers 21, Society for Economic Dynamics.
  12. Kimura, Takeshi & Kurozumi, Takushi, 2010. "Endogenous nominal rigidities and monetary policy," Journal of Monetary Economics, Elsevier, vol. 57(8), pages 1038-1048, November.
  13. Michael T. Kiley, 1996. "Endogenous price stickiness and business cycle persistence," Finance and Economics Discussion Series 96-23, Board of Governors of the Federal Reserve System (U.S.).
  14. Levin, Andrew & Yun, Tack, 2007. "Reconsidering the natural rate hypothesis in a New Keynesian framework," Journal of Monetary Economics, Elsevier, vol. 54(5), pages 1344-1365, July.
  15. Michael Kiley, 2004. "Is Moderate-To-High Inflation Inherently Unstable?," Econometric Society 2004 North American Summer Meetings 193, Econometric Society.
  16. Taylor, John B, 1980. "Aggregate Dynamics and Staggered Contracts," Journal of Political Economy, University of Chicago Press, vol. 88(1), pages 1-23, February.
  17. Thomas A. Lubik & Frank Schorfheide, 2004. "Testing for Indeterminacy: An Application to U.S. Monetary Policy," American Economic Review, American Economic Association, vol. 94(1), pages 190-217, March.
  18. Bennett T. McCallum, 2006. "E-Stability vis-a-vis Determinacy Results for a Broad Class of Linear Rational Expectations Models," NBER Working Papers 12441, National Bureau of Economic Research, Inc.
  19. Tommy Sveen & Lutz Weinke, 2006. "Firm-specific capital, nominal rigidities, and the Taylor principle," Working Paper 2006/06, Norges Bank.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Guido Ascari & Argia M. Sbordone, 2013. "The Macroeconomics of Trend Inflation," DEM Working Papers Series 053, University of Pavia, Department of Economics and Management.
  2. Kurozumi, Takushi & Zandweghe, Willem Van, 2013. "Kinked demand curves, the natural rate hypothesis, and macroeconomic stability," Research Working Paper RWP 13-08, Federal Reserve Bank of Kansas City.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:fip:fedkrw:rwp12-09. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Lu Dayrit).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.