American Economic Review Vol. 93 No. 4 2003

Inflation Persistence and Relative Contracting

Steinar Holden¹; John C. Driscoll²

¹ Department of Economics, University of Oslo, Box 1095 Blindern, 0317 Oslo, Norway, and Norges Bank. · ² Federal Reserve Board, Mail Stop 75, 20th and Constitution Avenue, NW, Washington, DC 20551.

Abstract

Macroeconomists have for some time been aware that the New Keynesian Phillips curve, though highly popular in the literature, cannot explain the persistence observed in actual inflation. We argue that one of the more prominent alternative formulations, the Fuhrer and Moore (1995) relative contracting model, is highly problematic. Fuhrer and Moore's 1995 formulation generates inflation persistence, but this is a consequence of their assuming that workers care about the past real wages of other workers. Making the more reasonable assumption that workers care about the current real wages of other workers, one obtains the standard formulation with no inflation persistence.

DOI

10.1257/000282803769206340

Volume

93

Issue

4

Pages

1369-1372

Language

en

Sources

bibtex:phds-export.bib openalex crossref

Cite

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