Re: inflation

[michael <michael@xxxxxxxxxxxxxxxxx>]

Here are some notes on the subject.


Brainard, William and George Perry. 1996. "Editor's Summary." Akerlof,
George, William Dickens, and George Perry. 1996. "The Macroeconomics of
Low Inflation." Brookings Papers on Economic Activity. 1, pp. 1-60, pp.
ix-xxxiii.
x: "the sustainable rate of unemployment consistent with steady
inflation is not a unique natural rate. Indeed, the sustainable
unemployment rate itself depends on the inflation rate. Simulations of
the model and direct estimation with time-series data suggest that the
lowest sustainable unemployment rate is achievable with a moderately
low, steady inflation rate. With zero inflation the sustainable
unemployment rate is measurably higher and real output and employment
are sacrificed."
##
Akerlof, George, William Dickens, and George Perry. 1996. "The
Macroeconomics of Low Inflation." Brookings Papers on Economic Activity.
1, pp. 1-60.
They demonstrate the prevalence of downward wage rigidity in the U.S.
eliminating monetary neutrality.
Thus, inflation tends to allow for more flexibility.
5: Truman Bewley and William Brainard interviewed business people in
Connecticut. They found that wage cuts were infrequent because employers
feared negative reactions.
5-20: Because workers react much more negatively to nominal wage cuts
than to real wage cuts, firms don't like to give nominal wage cuts. They
fear workers reactions. In fact firms don't give very many nominal wage
cuts.
There is considerable heterogeneity in the fortunes of firms in the
economy and considerable heterogeneity in desired wage setting (in fact
even with low inflation the standard deviation of wage changes in
samples of firms or workers after correction for measurement error are
on the order of 2.5 to 9 percent).
When nominal output growth gets low (<4%) a significant number of firms
that would like to cut their real wages run up against the nominal zero
constraint. They end up paying wages which are too high. They therefore
hire fewer workers.

--

Michael Perelman
Economics Department
California State University
michael at ecst.csuchico.edu
Chico, CA 95929
530-898-5321
fax 530-898-5901