Low-Inflation Targeting and Unemployment Persistence
AbstractA recent model by Akerlof, Dickens and Perry (2000) (ADP) predicts that low inflation may cause unemployment to persist at high levels. This finding should be of major interest to European countries where inflation is targeted at low levels. We specify a small open economy version of the ADP model and apply it to Swedish data. The results indicate that raising the Swedish inflation target from 2 to 4% would bring long-run unemployment down by two percentage points, to 2.0-2.5%. EMU membership, with inflation at the average of the present 0-2% band, would raise unemployment to around 6%. Membership thus implies a rejection of a national inflation target that could maximize employment. Given that long run unemployment-inflation trade-offs can be found in other countries as well, there is nothing to suggest that these trade-offs are identical across countries. A single inflation rate in the EMU may then cause unemployment to widely exceed the lowest sustainable rate in individual countries. We also extend the ADP model by showing theoretically that the unemployment minimizing inflation rate could lead to too low output. However, empirically we find, both for Sweden and the U.S., that minimum unemployment and maximum output occur at roughly the same rate of inflation.
Download InfoIf 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.
Bibliographic InfoPaper provided by Trade Union Institute for Economic Research in its series Working Paper Series with number 188.
Length: 34 pages
Date of creation: 07 May 2003
Date of revision:
Phillips curve; Efficiency wages; Near-rationality;
Find related papers by JEL classification:
- E24 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution
- E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
- J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts
This paper has been announced in the following NEP Reports:
- NEP-IFN-2003-09-14 (International Finance)
- NEP-MAC-2003-09-14 (Macroeconomics)
- NEP-MON-2003-09-14 (Monetary Economics)
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.:
- Chen, P. & Edin, P.A., 1996.
"Efficiency Wages and Industry Wages Differentials : A Comparison Across Methods of Pay,"
314, Australian National University - Department of Economics.
- Paul Chen & Per-Anders Edin, 2002. "Efficiency Wages and Industry Wage Differentials: A Comparison Across Methods of Pay," The Review of Economics and Statistics, MIT Press, vol. 84(4), pages 617-631, November.
- Agell, Jonas & Lundborg, Per, 1995.
" Theories of Pay and Unemployment: Survey Evidence from Swedish Manufacturing Firms,"
Scandinavian Journal of Economics,
Wiley Blackwell, vol. 97(2), pages 295-307, June.
- Agell, J. & Lundborg, P., 1992. "Theories of Pay and Unemployment: Survey Evidence from Swedish Manufacturing Firms," Papers 1993-8, Uppsala - Working Paper Series.
- Agell, Jonas & Lundborg, Per, 1993. "Theories of Pay and Unemployment: Survey Evidence from Swedish Manufacturing Firms," Working Paper Series 380, Research Institute of Industrial Economics.
- Bullard, James & Keating, John W., 1995. "The long-run relationship between inflation and output in postwar economies," Journal of Monetary Economics, Elsevier, vol. 36(3), pages 477-496, December.
- Marika Karanassou & Hector Sala & Dennis J. Snower, 2002.
"A Reappraisal of the Inflation-Unemployment Tradeoff,"
479, Queen Mary, University of London, School of Economics and Finance.
- Karanassou, Marika & Sala, Hector & Snower, Dennis J., 2005. "A reappraisal of the inflation-unemployment tradeoff," European Journal of Political Economy, Elsevier, vol. 21(1), pages 1-32, March.
- Karanassou, Marika & Sala, Héctor & Snower, Dennis J., 2005. "A reappraisal of the inflation-unemployment tradeoff," Open Access Publications from Kiel Institute for the World Economy 3457, Kiel Institute for the World Economy (IfW).
- Karanassou, Marika & Sala, Hector & Snower, Dennis J., 2002. "A Reappraisal of the Inflation-Unemployment Tradeoff," IZA Discussion Papers 636, Institute for the Study of Labor (IZA).
- King, Robert G. & Watson, Mark W., 1994.
"The post-war U.S. phillips curve: a revisionist econometric history,"
Carnegie-Rochester Conference Series on Public Policy,
Elsevier, vol. 41(1), pages 157-219, December.
- Robert G. King & Mark W. Watson, 1994. "The post-war U.S. Phillips curve: a revisionist econometric history," Working Paper Series, Macroeconomic Issues 94-14, Federal Reserve Bank of Chicago.
- George A. Akerlof & William T. Dickens & George L. Perry, 2000. "Near-Rational Wage and Price Setting and the Long-Run Phillips Curve," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 31(1), pages 1-60.
- Ray C. Fair, 2000. "Testing the NAIRU Model for the United States," The Review of Economics and Statistics, MIT Press, vol. 82(1), pages 64-71, February.
- George A. Akerlof & William R. Dickens & George L. Perry, 1996. "The Macroeconomics of Low Inflation," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 27(1), pages 1-76.
- Holden,S., 2001.
"Monetary policy and nominal rigidities under low inflation,"
16/2001, Oslo University, Department of Economics.
- Steinar Holden, 2001. "Monetary Policy and Nominal Rigidities under Low Inflation," CESifo Working Paper Series 481, CESifo Group Munich.
- Edmund S. Phelps, 1968. "Money-Wage Dynamics and Labor-Market Equilibrium," Journal of Political Economy, University of Chicago Press, vol. 76, pages 678.
- Selén, Jan & Ståhlberg, Ann-Charlotte, 2004. "Wage and Compensation Inequality — How Different?," Working Paper Series 197, Trade Union Institute for Economic Research.
- Lundborg, Per, 2008. "Wage Redistribution and the Long Run Phillips Curve," Working Paper Series 3/2008, Swedish Institute for Social Research.
- Bryan, Michael F. & Palmqvist, Stefan, 2005. "Testing Near-Rationality using Detailed Survey Data," Working Paper Series 183, Sveriges Riksbank (Central Bank of Sweden).
- Michael F. Bryan & Stefan Palmqvist, 2005. "Testing near-rationality using detailed survey data," Working Paper 0502, Federal Reserve Bank of Cleveland.
- Abdul Aleem & Amine Lahiani, 2011. "Estimation and evaluation of core inflation measures," Applied Economics, Taylor & Francis Journals, vol. 43(25), pages 3619-3629.
- Lundborg, Per, 2005. "Wage Fairness, Growth and the Utilization of R&D Workers," Working Paper Series 206, Trade Union Institute for Economic Research.
- Stefan Palmqvist & Michael F. Bryan, 2005. "Testing Near-Rationality Using Detail Survey Data," Computing in Economics and Finance 2005 371, Society for Computational Economics.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Sune Karlsson).
If references are entirely missing, you can add them using this form.