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Money wage rigidity, monopoly power and hysteresis


Palacio Vera, Alfonso (2008) Money wage rigidity, monopoly power and hysteresis. [ Documentos de Trabajo de la Facultad de Ciencias Económicas y Empresariales; nº 02, 2008, ISSN: 2255-5471 ]

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The literature that addresses the effects on the level of aggregate demand of changes in the
degree of monopoly typically assumes away the existence of an “inflation barrier” and an inflationtargeting central bank. The presence of these two institutional factors entails that any aggregate demand change brought about by changes in the functional distribution of income will tend to be offset by changes in real interest rates. We postulate a simple macroeconomic model for a closed economy with a government sector and hypothesize that a change in the average mark up affects the inflation rate, the “inflation-barrier” and aggregate demand. The model allows for the analysis of the effects on the employment rate of demand and supply shocks when the economy exhibits asymmetric inflation dynamics (AID) and hysteresis effects. Among other results we find that, if the economy exhibits AID and hysteresis, the effect on the employment rate of a change in the mark up is likely to be either ineffectual or counterproductive even if the associated demand shock is expansionary. We also show that an inadequate functional distribution of income may lead to the occurrence of an aggregate demand deficiency problem.

Item Type:Working Paper or Technical Report
Additional Information:

Clasificacion JEL: B50, E12, E24, E50

Uncontrolled Keywords:Neutral interest rate, Degree of monopoly, Asymmetric inflation dynamics, Zero lower bound, Hysteresis, Reversibility.
Subjects:Social sciences > Economics > Money
Series Name:Documentos de Trabajo de la Facultad de Ciencias Económicas y Empresariales
ID Code:8181

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