Real Wages, Monetary Accommodation, and Inflation
26 Pages Posted: 18 Apr 2007 Last revised: 9 Aug 2010
Date Written: October 1989
We analyze the dynamics of inflation in an economy characterized by a forward-looking, staggered, price and wage determination process, and by monetary accommodation. In our model, inflation reconciles the conflicting claims of workers and firms. The model is capable of generating a positive association between real wages and inflation, of the type that has been observed in some high-inflation countries. It generates a price-wage spiral but does not result in inflationary inertia.
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