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Welfare Costs Of Shifting Trend Inflation: Staggered Wage And Price Contracts

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  • Thanh Hà Lê
  • Trung Thành Tô
  • Ngoc Thang Doan

Abstract

We develop a New Keynesian model featuring staggered price and wage contracts to study welfare costs of exogenous variations in trend inflation. The analyses show that the consequences of constant positive trend inflation and shifting trend inflation are severe, especially when trend inflation is high. Among two channels, staggered wage contracts play a vital role in transmitting adverse impacts of constant and shifting trend inflation into the economy. Without the staggered wage channel, these costs are modest. We also conduct exercises to examine the sensitivity of welfare costs to a wide range of plausible parameters. The results show that if the price and wage friction are sufficiently large, the price and wage indexation level are sufficiently small, or there is upward biased trend inflation process, the welfare costs become larger.

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  • Thanh Hà Lê & Trung Thành Tô & Ngoc Thang Doan, 2019. "Welfare Costs Of Shifting Trend Inflation: Staggered Wage And Price Contracts," Bulletin of Economic Research, Wiley Blackwell, vol. 71(2), pages 136-159, April.
    • Handle: RePEc:bla:buecrs:v:71:y:2019:i:2:p:136-159
    DOI: 10.1111/boer.12190
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    Cited by:

    1. Le Thanh Ha & To Trung Thanh & Doan Ngoc Thang, 2021. "Welfare costs of monetary policy uncertainty in the economy with shifting trend inflation," Scottish Journal of Political Economy, Scottish Economic Society, vol. 68(1), pages 126-154, February.

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