Envy, guilt, and the Phillips curve

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in EconStor may AbstractWe incorporate inequity aversion into an otherwise standard New Keynesian dynamic equilibrium model with Calvo wage contracts and positive in ‡ation. 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 in‡ation 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 e¤ect is stronger than the guilt e¤ect, according to the available empirical evidence, a rise in the in ‡ation rate leads workers to supply more labor over the contract period, generating a signi…cant positive long-run relation between in ‡ation and output (and employment), for low in ‡ation rates. This Phillips curve relation, together with an ine¢ cient zero-in ‡ation steady state, provides a rationale for a positive long-run in ‡ation rate. Given standard calibrations, optimal monetary policy is associated with a long-run in ‡ation rate around 2 percent.JEL classi…cation: D03, E20, E31, E50.

Phillips and Wage Curves: Empirical Evidence from Bosnia and Herzegovina

“…However, if the inflation-unemployment relationship is positive, a higher inflation rate in the EU might indeed burden the economy of BiH further and as a result even increase pressure on employment. This possible negative long-term effect of inflation on unemployment has been highlighted by Ahrens and Snower [1]. Moreover, estimating the extent of wage rigidity in BiH is important for understanding monetary policy transmission mechanism between the Euro area and BiH and to analyze whether wage curve mechanisms are also in force in post-war BiH.…”

A representation theorem for guilt aversion

“…More recently, guilt averse behavior has also made its way into macroeconomic modeling. Thus Ahrens and Snower (2014) incorporates guilt and envy into a dynamic stochastic equilibrium model and shows that when these emotions are experienced by workers, a Phillips curve relationship between inflation and output can be generated.…”