Consider a version of the Phillips curve where a proportion of wages, 1>>0, are now indexed to the rate of inflation. In these labor contracts, nominal wages move one-for-one with the actual price level. The remaining proportion of wages, (1-2), are set on the basis of expected inflation: nt=λnt + (1) et+ (m+z)-aut (2) a. Suppose that лet=πt-1. Solve for the natural rate of unemployment (the rate such that at nt-1). Is the natural rate of unemployment different as a result of wage indexation? b. Re-write the Phillips curve in terms of the difference between чt and un using the value for un you calculated in (a). How does wage indexation impact the way changes in inflation respond to deviations of the unemployment rate from the natural rate? What is the intuition for this result?
Consider a version of the Phillips curve where a proportion of wages, 1>>0, are now indexed to the rate of inflation. In these labor contracts, nominal wages move one-for-one with the actual price level. The remaining proportion of wages, (1-2), are set on the basis of expected inflation: nt=λnt + (1) et+ (m+z)-aut (2) a. Suppose that лet=πt-1. Solve for the natural rate of unemployment (the rate such that at nt-1). Is the natural rate of unemployment different as a result of wage indexation? b. Re-write the Phillips curve in terms of the difference between чt and un using the value for un you calculated in (a). How does wage indexation impact the way changes in inflation respond to deviations of the unemployment rate from the natural rate? What is the intuition for this result?
Chapter17: The Trade-off Between Inflation And Unemploy
Section: Chapter Questions
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