Inflation persistence. (English) Zbl 0834.90037

Summary: This paper demonstrates that the behavior of the conventional Phelps- Taylor model of overlapping wage contracts stands in stark contrast with important features of U.S. macro data for inflation and output. In particular, the Phelps-Taylor specification implies far too little inflation persistence. We present a new contracting model, in which agents are concerned with relative real wages, that is data-consistent. In a specification that nests both models, we resoundingly reject the conventional contracting model, but cannot reject the new contracting model.


91B62 Economic growth models
91B82 Statistical methods; economic indices and measures
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