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Long‐Run Inflation and the Distorting Effects of Sticky Wages and Technical Change
Author(s) -
PHANEUF LOUIS,
VICTOR JEAN GARDY
Publication year - 2019
Publication title -
journal of money, credit and banking
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.763
H-Index - 108
eISSN - 1538-4616
pISSN - 0022-2879
DOI - 10.1111/jmcb.12588
Subject(s) - economics , allocative efficiency , inflation (cosmology) , wage , dispersion (optics) , price setting , new keynesian economics , price dispersion , monetary economics , price level , keynesian economics , macroeconomics , econometrics , labour economics , monetary policy , microeconomics , physics , theoretical physics , optics
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.