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Money wage rigidity, monopoly power and hysteresis

Palacio Vera, Alfonso (2008) Money wage rigidity, monopoly power and hysteresis. [Working Paper or Technical Report]

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Abstract

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
Volume:2008
Number:02
ID Code:8181
Deposited On:03 Nov 2008 15:51
Last Modified:14 Jan 2014 09:46

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