Essays in credibility and the source of inflation persistence
García, Juan Angel, 1969- (2000) Essays in credibility and the source of inflation persistence. PhD thesis, University of Warwick.
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Official URL: http://webcat.warwick.ac.uk/record=b1369189~S15
In the first chapter we investigate the strategy of exchange rate pegging as a solution to the lack of credibility of domestic monetary policy in the context of the European Monetary System (EMS). Existing theoretical models cannot explain the following features of the EMS and its crisis in 1992: its progressive hardening from 1987 onwards; the fact that credibility was 'shared'; the progressive deterioration of credibility after the first Danish referendum without changes in the economic fundamentals. We argue that the reason lies in the fact that the literature has not incorporated the changes in the perceived prospects of EMU. We show that an adjustable peg regime that incorporates those prospects can explain the three features listed above and provide an alternative interpretation of the EMS crisis. We then focus our attention on the short-run dynamics of U.S. inflation. U.S. price inflation exhibits substantial inertia. The source of that inflation inertia is however controversial. In the second part of the thesis, we derive a wage contracting specification that implies inflation persistence to investigate the role of nominal rigidities to explain that degree of inertia. The contracting specification is derived from intertemporal optimisation under two basic assumptions: (i) wage staggering; (11) relative wage concern by wage-setters. The novelty is the analysis of relative wage concern. In chapter 2 we review the existing evidence and theoretical support pointing at relative wage concern as a fundamental factor in the wage contracting process. In chapters 3 and 4, we build a dynamic general equilibrium macromodel to study its implications. In chapter 3 we investigate two potential sources of inflation inertia: the contracting specification described above, and the lack of rationality of expectations. We then carry out a test for the source of inflation inertia. Our empirical results suggest that alternative sources of inertia beyond that imparted by the lack of full rationality of expectations are needed to characterise U.S. inflation dynamics. In chapter 4 we focus our investigation on the persistence of the real effects of money shocks. In contrast to previous models of staggered wages/prices, output and inflation persistence are robust findings of the model. Moreover, persistence results hold for all the sensible parameterisations. Given the empirical evidence in favour of the existence of a strong relative wage concern, we conclude that relative concern may be the missing piece in the money shocks persistence puzzle raised by recent literature.
|Item Type:||Thesis or Dissertation (PhD)|
|Subjects:||H Social Sciences > HB Economic Theory|
|Library of Congress Subject Headings (LCSH):||Monetary policy -- Europe, European Monetary System (Organization), Foreign exchange rates -- Europe, Inflation (Finance) -- United States, Wages -- United States -- Econometric models|
|Institution:||University of Warwick|
|Theses Department:||Department of Economics|
|Supervisor(s)/Advisor:||Miller, Marcus, 1941- ; Herrendorf, Berthold|
|Sponsors:||Fundación Ramón Areces ; País Vasco (Spain)|
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