Inflation Persistence and Relative Contracting

In an important paper, Jeffrey Fuhrer and George Moore (1995) showed that the standard formulation of staggered wage setting due to John Taylor (1980) implied price stickiness, but not inflation stickiness. Fuhrer and Moore proposed a new formulation, which they referred to as the relative contracti...

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Bibliographic Details
Published in:The American economic review 2003-09, Vol.93 (4), p.1369-1372
Main Authors: Holden, Steinar, Driscoll, John C.
Format: Article
Language:English
Subjects:
Board of Governors of the Federal Reserve System
Economic models
Economic theory
Flint
Inflation
Macroeconomic modeling
Macroeconomics
Monetary economics
Price indices
Price levels
Real wages
Shorter Papers
Studies
Wage contracts
Wages
Wages & salaries
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Summary:In an important paper, Jeffrey Fuhrer and George Moore (1995) showed that the standard formulation of staggered wage setting due to John Taylor (1980) implied price stickiness, but not inflation stickiness. Fuhrer and Moore proposed a new formulation, which they referred to as the relative contracting model, which exhibits persistent in inflation. As a justification for their new model, Fuhrer and Moore argue that agents care about relative real wages, and not about nominal wages. In this note, it is argued that this motivation is misleading. Fuhrer and Moore's model is based on agents caring about the real wages that other workers obtained in the past. If Fuhrer and Moore's model were modified so that workers cared about the contemporaneous real wages of otehr workers, which is arguably the more reasonable assumption, then the model coincides with the standard formulation of Taylor (1980).
ISSN:0002-8282
1944-7981
DOI:10.1257/000282803769206340