Coordination, Fair Treatment and Inflation Persistence

38 Pages Posted: 15 Sep 2002 Last revised: 29 Oct 2010

See all articles by John C. Driscoll

John C. Driscoll

Federal Reserve Board

Steinar Holden

University of Oslo - Department of Economics; Norges Bank; CESifo (Center for Economic Studies and Ifo Institute)

Multiple version iconThere are 2 versions of this paper

Date Written: September 2002

Abstract

Most wage-contracting models with rational expectations fail to replicate the persistence in inflation observed in the data. We argue that coordination problems and multiple equilibria are the keys to explaining inflation persistence. We develop a wage-contracting model in which workers are concerned about being treated fairly. This model generates a continuum of equilibria (consistent with a range for the rate of unemployment), where workers want to match the wage set by other workers. If workers' expectations are based on the past behavior of wage growth, these beliefs will be self-fulfilling and thus rational. Based on quarterly U.S. data over the period 1955-2000, we find evidence that inflation is more persistent between unemployment rates of 4.7 and 6.5 percent, than outside these bounds, as predicted by our model.

Suggested Citation

Driscoll, John C. and Holden, Steinar, Coordination, Fair Treatment and Inflation Persistence (September 2002). NBER Working Paper No. w9174. Available at SSRN: https://ssrn.com/abstract=330313

John C. Driscoll (Contact Author)

Federal Reserve Board ( email )

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Steinar Holden

University of Oslo - Department of Economics ( email )

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CESifo (Center for Economic Studies and Ifo Institute)

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