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Inflation and the Dispersion of Real Wages

  • Alok Kumar

The effects of inflation on real wage dispersion and welfare are studied in a cash-in-advance economy with a Walrasian goods market but a labor market with search friction. In the labor market, firms post wages and both employed and unemployed workers search among the posted wages. In equilibrium, a higher inflation rate reduces the dispersion in real wages. This result is consistent with both the observed trends in wage dispersion and the inflation rate witnessed in the 1980's and the 1990's in the U.S. and the empirical literature linking reduced inflation to greater wage dispersion. While higher inflation always lowers consumption, output, and employment, the optimal inflation rate exceeds the Friedman ru

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Paper provided by Econometric Society in its series Econometric Society 2004 Far Eastern Meetings with number 750.

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Date of creation: 11 Aug 2004
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Handle: RePEc:ecm:feam04:750
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