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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

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.

Suggested Citation

  • Stefan Ederer, 2010. "Employment, Inflation and Income Distribution in an Open Economy. Pricing-to-market in a Modified NAIRU Model," WIFO Working Papers 360, WIFO.
    • Handle: RePEc:wfo:wpaper:y:2010:i:360
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    File URL: https://www.wifo.ac.at/wwa/pubid/38422
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    References listed on IDEAS

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    6. Blecker, Robert A, 1989. "International Competition, Income Distribution and Economic Growth," Cambridge Journal of Economics, Cambridge Political Economy Society, vol. 13(3), pages 395-412, September.
    7. Mark Setterfield, 2009. "Macroeconomics without the LM curve: an alternative view," Cambridge Journal of Economics, Cambridge Political Economy Society, vol. 33(2), pages 273-293, March.
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