Modelling the heuristic dynamics of the wage and price curve model of equilibrium unemployment
AbstractA standard model of equilibrium unemployment consists of static equations for real wage ambitions (wage curve) and real wage scope (price curve), which jointly determine the NAIRU. The heuristics of the model states that unless the rate of unemployment approaches the NAIRU from any given initial value, inflation will be increasing or decreasing over time. We formalize this influential heuristic argument with the aid of a dynamic model of the wage-price spiral where the static theory's equations are re-interpretated as attractor relationships. We show that NAIRU unemployment dynamics are sufficient but not necessary for inflation stabilization, and that the dynamic wage-price spiral model generally has a dynamically stable solution for any pre-determined rate of unemployment. We also discuss a restricted version of the model that conforms to the accelerationist view that inflation increases/falls if unemployment is not at its ‘natural rate’.
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Bibliographic InfoPaper provided by Research Department of Statistics Norway in its series Discussion Papers with number 671.
Date of creation: Jan 2012
Date of revision:
AS-AD; equilibrium-correction; imperfect competition; macroeconomics; NAIRU; Phillips curve; unemployment; wage-price spiral.;
Find related papers by JEL classification:
- E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution
- E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
- J50 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining - - - General
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-01-18 (All new papers)
- NEP-CBA-2012-01-18 (Central Banking)
- NEP-LAB-2012-01-18 (Labour Economics)
- NEP-MAC-2012-01-18 (Macroeconomics)
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