Fairness, ambiguity, wage markups and disinflation costs

Lunardelli, Andre (2025): Fairness, ambiguity, wage markups and disinflation costs.

Abstract

The notion that much of the reduction in disinflation costs in recent decades is due to better anchoring converges with the proposition of Dow, Simonsen and Werlang (1993) that part of the sacrifice ratios of poorly anchored economies may be caused by this coordination problem, which they modeled with ambiguity. The present paper relates ambiguity in disinflation with fairness in a labor market in which past inflation is a reference for wage readjustments, but with the threat of reducing effort not materializing, thus leading to labor hoarding. It therefore presents similarities with Bhaskar (1990) and Driscoll and Holden (2004), but using a new Keynesian DSGE model. Bayesian inference with North American data using the model shows that this pattern was especially pronounced during the Volcker disinflation, had local peaks after the oil shocks during the great inflation, and has not happened after that, including in the disinflation immediately after the COVID-19 pandemic. This provides an explanation for the results of some well-known works with increases in a wide concept of wage markups during the Volcker disinflation and a line of reasoning to analyse Central Bank policy in disinflation. Regarding policy, the analysis recommends an exchange rate anchor (or a coordination device similar to that oh the Real plan) when initial inflation and ambiguity are very high, a transition with the announcement of a future inflation targeting (IT) when they are in a moderate level, the implementation of an explicit IT when passing from moderate to low inflation regime and an implicit target when low inflation is consolidated.

• Item Type: MPRA Paper
• Language: English
• Keywords: Disinflation, ambiguity, fairness, wage markups, sacrifice ratios, Volcker disinflation, Phillips curve, coordination failure, inflation targeting, inflation persistence, indexation, labor hoarding.
• Subjects: D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D80 - General; E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E31 - Price Level ; Inflation ; Deflation; E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E32 - Business Fluctuations ; Cycles; E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E42 - Monetary Systems ; Standards ; Regimes ; Government and the Monetary System ; Payment Systems; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E52 - Monetary Policy; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E58 - Central Banks and Their Policies; J - Labor and Demographic Economics > J3 - Wages, Compensation, and Labor Costs > J39 - Other; J - Labor and Demographic Economics > J6 - Mobility, Unemployment, Vacancies, and Immigrant Workers > J64 - Unemployment: Models, Duration, Incidence, and Job Search

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