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Employment, Inflation and Income Distribution in an Open Economy. Pricing-to-market in a Modified NAIRU Model

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  • Stefan Ederer

    (WIFO)

Abstract

The paper modifies a standard NAIRU model by implementing "pricing-to-market" as the basic assumption for the price setting behaviour of firms in an open economy. This entirely changes the outcomes of the model: First, inflation in equilibrium is stable at any rate of unemployment; the long-run Phillips curve is horizontal. Second, income distribution varies with the level of employment. Third, supplemented with a demand equation which allows for effects of both income distribution and international competitiveness, the NAIRU ceases to be a "strong attractor". These characteristics to a certain extent open up the space for expansive wage and demand policies.

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Bibliographic Info

Paper provided by WIFO in its series WIFO Working Papers with number 360.

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Length: 25 pages
Date of creation: 22 Feb 2010
Date of revision:
Handle: RePEc:wfo:wpaper:y:2010:i:360

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Keywords: Wages; Inflation; NAIRU; Demand; Distribution;

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  1. Mark Setterfield, 2009. "Macroeconomics without the LM curve: an alternative view," Cambridge Journal of Economics, Oxford University Press, vol. 33(2), pages 273-293, March.
  2. Layard, Richard & Nickell, Stephen & Jackman, Richard, 2005. "Unemployment: Macroeconomic Performance and the Labour Market," OUP Catalogue, Oxford University Press, number 9780199279173, October.
  3. Bhaduri, Amit & Marglin, Stephen, 1990. "Unemployment and the Real Wage: The Economic Basis for Contesting Political Ideologies," Cambridge Journal of Economics, Oxford University Press, vol. 14(4), pages 375-93, December.
  4. Carlin, Wendy & Soskice, David, 1990. "Macroeconomics and the Wage Bargain: A Modern Approach to Employment, Inflation, and the Exchange Rate," OUP Catalogue, Oxford University Press, number 9780198772446, October.
  5. Engelbert Stockhammer & Özlem Onaran & Stefan Ederer, 2007. "Functional income distribution and aggregate demand in the Euro-area," Department of Economics Working Papers wuwp102, Vienna University of Economics, Department of Economics.
  6. Blecker, Robert A, 1989. "International Competition, Income Distribution and Economic Growth," Cambridge Journal of Economics, Oxford University Press, vol. 13(3), pages 395-412, September.
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