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Employment, Inflation and Income Distribution in an Open Economy. Pricing-to-market in a Modified NAIRU Model
[WIFO Working Papers, 360/2010 , 25 pages]

Stefan Ederer
The paper modifies a standard NAIRU model by implementing "pricing-to-market" as the basic assumption for the price setting behaviour of firms in an open economy. This entirely changes the outcomes of the model: First, inflation in equilibrium is stable at any rate of unemployment; the long-run Phillips curve is horizontal. Second, income distribution varies with the level of employment. Third, supplemented with a demand equation which allows for effects of both income distribution and international competitiveness, the NAIRU ceases to be a "strong attractor". These characteristics to a certain extent open up the space for expansive wage and demand policies.
Research group: 
Macroeconomics and European Economic Policy

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Publication language: English
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