Kiel Working Papers, Kiel Institute for World Economics
No 1754:
Envy, Guilt, and the Phillips Curve
Dennis Snower Steffen Ahrens
Abstract: We incorporate inequity aversion into an otherwise
standard New Keynesian dynamic equilibrium model with Calvo wage contracts
and positive inflation. Workers with relatively low incomes experience
envy, whereas those with relatively high incomes experience guilt. The
former seek to raise their income, and the latter seek to reduce it. The
greater the inflation rate, the greater the degree of wage dispersion under
Calvo wage contracts, and thus the greater the degree of envy and guilt
experienced by the workers. Since the envy effect is stronger than the
guilt effect, according to the available empirical evidence, a rise in the
inflation rate leads workers to supply more labor over the contract period,
generating a significant positive long-run relation between inflation and
output (and employment), for low inflation rates. This Phillips curve
relation, together with an inefficient zero-inflation steady state,
provides a rationale for a positive long-run inflation rate. Given standard
calibrations, optimal monetary policy is associated with a long-run
inflation rate around 2 percent
Keywords: inflation, long-run Phillips curve, fairness, inequity aversion; (follow links to similar papers)
JEL-Codes: D03,; E20,; E31,; E50; (follow links to similar papers)
36 pages, January 2012
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