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Inflation targets and endogenous wage markups in a New Keynesian model

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  • Di Bartolomeo, Giovanni
  • Tirelli, Patrizio
  • Acocella, Nicola

Abstract

Empirical contributions show that wage re-negotiations take place while expiring contracts are still in place. This is captured by assuming that nominal wages are pre-determined. As a consequence, wage setters act as Stackelberg leaders, whereas in the typical New Keynesian model the wage-setting rule implies that they play a Nash game. We present a DSGE New Keynesian model with pre-determined wages and money entering the representative household’s utility function and show how these assumptions are sufficient to identify an inverse relationship between the inflation target and the wage markup (and thus employment) both in the short and the long run. This is due to the complementary effects that wage claims and the inflation target have on money holdings. Model estimates suggest that a moderate long-run inflation rate generates non-negligible output gains.

Suggested Citation

  • Di Bartolomeo, Giovanni & Tirelli, Patrizio & Acocella, Nicola, 2012. "Inflation targets and endogenous wage markups in a New Keynesian model," Journal of Macroeconomics, Elsevier, vol. 34(2), pages 391-403.
  • Handle: RePEc:eee:jmacro:v:34:y:2012:i:2:p:391-403
    DOI: 10.1016/j.jmacro.2012.01.007
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    References listed on IDEAS

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    Cited by:

    1. Andrea Vaona, 2015. "Inflation gifts restrictions for structural VARs: evidence from the US," Working Papers 16/2015, University of Verona, Department of Economics.

    More about this item

    Keywords

    Trend inflation; Long-run Phillips curve; Inflation targeting; Real money balances;

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • J51 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining - - - Trade Unions: Objectives, Structure, and Effects
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity

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