chris ti a no

8/14/2019 Chris Ti a No

1/15

scuss on o :Trend Inflation Wa e and Price

Rigidities, and Welfare

Amano, Moran, Murchison, Rennison

Lawrence Christiano


2/15

The public has made it clear that it does not like

Inflation is viewed as being very socially costly

Economists have not been particularly successful at identifying what it is that makes inflation so costly.

This paper proposes an interesting reason for the apparent high cost of inflation.


3/15

The idea is very simple.

any me, a su se o ouse o s se s s wage,

The other

households:

i,t

To avoid distortions, would need for the non i,t i,t 1

op m zers o o e o ow ng:gross growth of technology inflation

W i,t g W i,t 1


4/15

Problems if non optimizers do:W i,t W i,t 1

Instead of:

W i,t g W i,t 1

Creates wage distortions, misallocation of resources NOT IMPORTANT FOR WELFARE

Makes the economy behave less competitively surpr s ng


5/15

Intuition in paper is very clear.

When household sets its wage, will take into accoun a , re a ve o genera eve o

wages, households

wage

will

fall.

Early on, wage will be high (high markup) Later on, wage will be low (low markup) The high dominates the low.


6/15


7/15

, . youd set it at 1.06 initially, and let it drift down to 0.94.


8/15

, . youd set it at 1.06 initially, and let it drift down to 0.94.

Thats true for prices but not wages.


9/15

, .With curvature in utility of leisure, this is very painful.


10/15

, .With curvature in utility of leisure, this is very painful.

Household responds by setting the wage rate systematically too high.


11/15

Observations Valuable insight about the property of models

that are in standard use.

Is non indexation an im ortant art of the actual costs of inflation?

If it were, then why dont people index the wage

The cost is not an externality. People would

to avoid it?


12/15

Observations. e reason ouse o s se e r wages g

initially is that it falls systematically over time and when it is low they have to work much harder

than the

want.

o we see t s appen ng n pract ce Households forced to work long hours in the later part

of wa e contracts when households are chea .

I suspect not.

Analysis seems vulnerable to the Barro critique .


13/15

Barro Critique households and firms are in long term relationships.

Frictions in the setting of wages should not have a substantial im act on outcomes.

But, sticky wages seem important for un erstan ing t e ata

a , er er r gar ave sugges e a you can have both sticky wages and be immune to Barro critique


14/15

Gertler Sala Trigari model:

Wages are negotiated periodically and are unsynchronized across firms.

Wage frictions affect the extensive margin: the amount of resources firms put into worker recruitment.

Wages do not affect the intensive margin. Hours worked are determined by efficiency, without reference to the wage.

This fact about the job is internalized in the wage bargain.

I suspect that the asymmetry driving this papers result will not be present in this alternative approach to the labor market. But, it would be useful to investigate this

more.


15/15

Very useful, clear and interesting paper.

It would be interesting to explore even more extensively, the theory about the cost of inflation in the paper.

w y victory? If it cost so much, wouldnt households simply index wages and avoid the problem.

Is the argument robust to reformulations of the model that avoid the Barro criti ue.

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