Trend Inflation, Endogenous Mark-ups And The Non-vertical Phillips Curve

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Executive Summary

Recent developments in macroeconomics resurrect the view that welfare costs of inflation arise because the latter acts as a tax on money balances. Empirical contributions show that wage re-negotiations take place while expiring contracts are still in place. Bringing these seemingly unrelated aspects together in a stylized general equilibrium model, the authors find a disciplining effect of a positive inflation target on the wage markup and identify a long-term trade-off between inflation and output.

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