Inflation

Summary

In economics, inflation is an increase in the general price level of goods and services in an economy. When the general price level rises, each unit of currency buys fewer goods and services; consequently, inflation corresponds to a reduction in the purchasing power of money. The opposite of inflation is deflation, a decrease in the general price level of goods and services. The common measure of inflation is the inflation rate, the annualized percentage change in a general price index. As prices faced by households do not all increase at the same rate, the consumer price index (CPI) is often used for this purpose. The employment cost index is also used for wages in the United States. There is disagreement among economists as to the causes of inflation. Low or moderate inflation is widely attributed to fluctuations in real demand for goods and services or changes in available supplies such as during scarcities. Moderate inflation affects economies in both positive and negative ways

Official source

https://en.wikipedia.org/wiki/Inflation

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Monopsony with nominal rigidities: An inverted Phillips Curve

Charles Cosme Henri Dennery

With nominal wage rigidities, it is crucial to distinguish whether wages are set by workers or firms — whether we have monopoly or monopsony power. This paper provides a model of monopsony power in the labour market and a monopsonistic Phillips Curve. If wages are set by firms who face nominal rigidities, and there is inflation, firms cannot adjust their wages fully. The real wage falls, and labour supply hence output decreases. This provides a Phillips Curve where the output gap is negatively correlated with wage inflation. In such a world monetary policy affects the intertemporal labour supply, while the Phillips Curve is a labour demand curve. Interest rate cuts reduce the labour supply instead of boosting demand: they are contractionary.

2020

Job turnover makes a wage Phillips Curve less forward-looking, with a smaller coefficient for inflation expectations. Workers discount future wage income with a low discount factor if there is a strong flow of job turnover; this implies that future inflation is discounted more heavily with job turnover. The Phillips Curve flattens both in the short and long run, due to the correlation between output and inflation expectations. The paper then derives the optimal monetary policy: in particular, the price targeting result of the Ramsey policy is violated when there is turnover.

2019

The welfare effect of foreign monetary conservatism with non-atomistic wage setters

Vincenzo Cuciniello

This paper sheds light on the real effects of foreign central bank’s degree of inflation aversion in presence of non-atomistic wage setters. It extends the Lippi’s (2003) framework to an open economy and identifies the key strategic mechanisms between monetary policy and wage-setting decisions so as to assess the real effects of domestic and foreign policy makers’ aversion to inflation. A main finding is that foreign central bank’s aversion to inflation always increases employment. The impact of domestic central bank’s aversion to inflation instead depends on the combination of three strategic effects.

Center for Fiscal Policy Working Paper Series2009