Adjusting Wages for Price Inflation: The Rational-Arrangements Phillips Curve

26 Pages Posted: 4 Dec 2007

Date Written: December 2007

Abstract

A model of nominal labor-price dynamics is derived from the choice of an efficient strategy to adjust wages for inflation. The model, named the rational-arrangements Phillips curve, identifies a central role for catch-up to price inflation that has already occurred and a more latent role for rational expectations of future inflation. The reinterpreted Phillips relationship demonstrates a number of desirable properties. It provides a cogent synthesis of money neutrality and non-neutrality, is consistent with inflation persistence in the aftermath of monetary shocks, informs monetary policymaking in hyper-inflationary periods, limits the practical application of the Lucas critique of macroeconometric model-building, and is congruent with practitioner descriptions of wage-setting arrangements.

Keywords: wages, catch-up, expectations, Phillips curve

JEL Classification: E10, E24, J30, M54

Suggested Citation

Annable, James, Adjusting Wages for Price Inflation: The Rational-Arrangements Phillips Curve (December 2007). Available at SSRN: https://ssrn.com/abstract=1045321 or http://dx.doi.org/10.2139/ssrn.1045321

James Annable (Contact Author)

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