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Long‐Run Inflation and the Distorting Effects of Sticky Wages and Technical Change

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  • LOUIS PHANEUF
  • JEAN GARDY VICTOR

Abstract

We show that the Calvo price‐setting model is not necessarily inconsistent with evidence of a weak relation between positive trend inflation and price dispersion. We identify the interaction between sticky wages and technical change as factors disrupting the allocative role of the wage system under positive trend inflation. In turn, this interaction generates inefficient wage dispersion, as opposed to price dispersion, which fuels inflation costs. We conclude that it is too early to dismiss the New Keynesian model as a useful vehicle to assess the costs of inflation.

Suggested Citation

  • Louis Phaneuf & Jean Gardy Victor, 2019. "Long‐Run Inflation and the Distorting Effects of Sticky Wages and Technical Change," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 51(1), pages 5-42, February.
    • Handle: RePEc:wly:jmoncb:v:51:y:2019:i:1:p:5-42
    DOI: 10.1111/jmcb.12588
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    3. Hashmat Khan & Louis Phaneuf & Jean Gardy Victor, 2020. "A Tale of Two Major Postwar Business Cycle Episodes," Working Papers 20-03, Chair in macroeconomics and forecasting, University of Quebec in Montreal's School of Management.
    4. Kengo Nutahara, 2021. "Trend inflation, asset prices and monetary policy," CIGS Working Paper Series 21-004E, The Canon Institute for Global Studies.

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