Discussion Papers no. 671

Modelling the heuristic dynamics of the wage and price curve model of equilibrium unemployment

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A standard model of equilibrium unemployment consists of static equations for real wage ambitions (wage curve) and real wage scope (price curve), which jointly determine the NAIRU. The heuristics of the model states that unless the rate of unemployment approaches the NAIRU from any given initial value, inflation will be increasing or decreasing over time. We formalize this influential heuristic argument with the aid of a dynamic model of the wage-price spiral where the static theory's equations are re-interpretated as attractor relationships. We show that NAIRU unemployment dynamics are sufficient but not necessary for inflation stabilization, and that the dynamic wage-price spiral model generally has a dynamically stable solution for any pre-determined rate of unemployment. We also discuss a restricted version of the model that conforms to the accelerationist view that inflation increases/falls if unemployment is not at its ‘natural rate’.

Om publikasjonen

Tittel

Modelling the heuristic dynamics of the wage and price curve model of equilibrium unemployment

Ansvarlige

Dag Kolsrud, Ragnar Nymoen

Serie og -nummer

Discussion Papers no. 671

Utgiver

Statistics Norway

Emne

Discussion Papers

ISSN

1892-753X

Antall sider

20

Målform

Engelsk

Om Discussion Papers

Discussion papers comprise research papers intended for international journals and books. A preprint of a Discussion Paper may be longer and more elaborate than a standard journal article as it may include intermediate calculations, background material etc.

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