Envy, guilt, and the Phillips curve

Arbeitspapier

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.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Kiel Working Paper ; No. 1754

Classification and Topics

• Classification: Wirtschaft ; Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy: General (includes Measurement and Data) ; Price Level; Inflation; Deflation ; Monetary Policy, Central Banking, and the Supply of Money and Credit: General
• Subject: inflation ; long-run Phillips curve ; fairness ; inequity aversion ; Phillips-Kurve ; Lohnverhandlungen ; Gerechtigkeit ; Neukeynesianische Makroökonomik ; Dynamisches Gleichgewicht ; Theorie

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Ahrens, Steffen ; Snower, Dennis J.
• Event: Veröffentlichung
• (who): Kiel Institute for the World Economy (IfW)
• (where): Kiel
• (when): 2012

Further information

• Handle: http://hdl.handle.net/10419/55275
• Last update: 10.03.2025, 11:44 AM CET