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A NOTE ON INFLATION PERSISTENCE IN A FAIR WAGE MODEL OF THE BUSINESS CYCLE

Published online by Cambridge University Press:  12 March 2009

David de la Croix ,
Gregory de Walque  and
Rafael Wouters
David de la Croix*
Affiliation:
Université catholique de Louvain
Gregory de Walque
Affiliation:
National Bank of Belgium
Rafael Wouters
Affiliation:
Université catholique de Louvain and National Bank of Belgium
*
Address correspondence to: David de la Croix, IRES-UCL, Place Montesquieu 3, B-1348 Louvain-la-Neuve, Belgium; e-mail: [email protected].
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Abstract

We generalize existing fair wage models to allow effort to vary over the business cycle. When effort is variable, wage fluctuations are partially compensated for by endogenous effort fluctuations, so that the sensitivity of marginal cost to output and employment variations is decreased. This new mechanism decreases the need for sluggishness to explain the observed high inflation persistence.

Keywords

Efficiency WageEffortInflation Persistence
Type
Notes
Information
Macroeconomic Dynamics , Volume 13 , Issue 5 , November 2009 , pp. 673 - 684
Copyright
Copyright © Cambridge University Press 2009

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