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Loss avoidance in nominal frames and fairness in downward nominal wage rigidity and disinflation

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  • Lunardelli, André
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    Abstract

    This paper proposes a more general definition of loss avoidance, relates it to fairness and applies it to the labor market. By influencing judgments about what is a fair wage readjustment, it can lead to coordination failures, generating downward nominal wage rigidity (DNWR) and disinflation costs even with common knowledge of credible policies. This suggests that policies with good frames, including inflation targeting, can mitigate the sacrifice ratio.

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    File URL: http://mpra.ub.uni-muenchen.de/20915/
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    Bibliographic Info

    Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 20915.

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    Date of creation: 21 Sep 2009
    Date of revision: 23 Feb 2010
    Handle: RePEc:pra:mprapa:20915

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    Related research

    Keywords: loss avoidance; fair wage effort hypothesis; nominal frame; higher order beliefs; Keynesian beauty contest; Phillips curve; inflation inertia; disinflation; downward nominal wage rigidity.;

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    1. Frederic S. Mishkin & Klaus Schmidt-Hebbel, 2007. "Does Inflation Targeting Make a Difference?," NBER Working Papers 12876, National Bureau of Economic Research, Inc.
    2. Maria Demertzis & Nicola Viegi, 2005. "Inflation Targets as Focal Points," Money Macro and Finance (MMF) Research Group Conference 2005 52, Money Macro and Finance Research Group.
    3. Laurence Ball, 1990. "Credible Disinflation with Staggered Price Setting," NBER Working Papers 3555, National Bureau of Economic Research, Inc.
    4. Amos Tversky & Daniel Kahneman, 1979. "Prospect Theory: An Analysis of Decision under Risk," Levine's Working Paper Archive 7656, David K. Levine.
    5. Ernst Fehr & Jean-Robert Tyran, 2001. "Does Money Illusion Matter?," American Economic Review, American Economic Association, vol. 91(5), pages 1239-1262, December.
    6. Jeffrey C. Fuhrer, 2006. "Intrinsic and Inherited Inflation Persistence," International Journal of Central Banking, International Journal of Central Banking, vol. 2(3), September.
    7. Stephen Morris & Hyun Song Shin, 2002. "Social Value of Public Information," American Economic Review, American Economic Association, vol. 92(5), pages 1521-1534, December.
    8. 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.
    9. Cover, James Peery, 1992. "Asymmetric Effects of Positive and Negative Money-Supply Shocks," The Quarterly Journal of Economics, MIT Press, vol. 107(4), pages 1261-82, November.
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