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Trend inflation, endogenous mark-ups and the non-vertical Phillips curve

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  • Di Bartolomeo Giovanni
  • Tirelli Patrizio
  • Acocella Nicola

Abstract

Recent developments in macroeconomics resurrect the view that welfare costs of inflation arise because the latter acts as a tax on money balances. Empirical contributions show that wage re-negotiations take place while expiring contracts are still in place. Bringing these seemingly unrelated aspects together in a stylized general equilibrium model, we find a disciplining effect of a positive inflation target on the wage markup and identify a long-term trade-off between inflation and output.

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Paper provided by Department of Communication, University of Teramo in its series wp.comunite with number 0065.

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Date of creation: Apr 2010
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Handle: RePEc:ter:wpaper:0065

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Web page: http://wp.comunite.it/

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Keywords: trend inflation; long-run Phillips curve; inflation targeting; real money balances;

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