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Fairness and the disinflation puzzle

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  • Lunardelli, Andre

Abstract

Following Driscoll and Holden (2004), I model forward-looking workers who consider it unfair if a wage adjustment fails to match past inflation. However, the present paper proposes a much larger effect by using the job finding rate as the measure of workers' opportunities outside the firm rather than the unemployment rate, develops a dynamic model with imperfect monitoring, and simulates a credible gradual disinflation with a large sacrifice ratio. It also uses the model to discuss real adverse shocks, the manner in which indexation is used in New Keynesian models, and the use of sticky information to explain disinflation costs.

Suggested Citation

  • Lunardelli, Andre, 2014. "Fairness and the disinflation puzzle," Economics Discussion Papers 2014-32, Kiel Institute for the World Economy (IfW Kiel).
    • Handle: RePEc:zbw:ifwedp:201432
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    References listed on IDEAS

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    More about this item

    Keywords

    inflation persistence; reciprocity; indexation; Phillips curve; coordination failure; asymmetric effects of monetary policy;
    All these keywords.

    JEL classification:

    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search

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