Dag Kolsrud

Unemployment and the open economy wage‐price spiral

We present a dynamic model of real wages in the open economy that encapsulates the well‐known “competing claims model” or “incomplete competition model” of real wage determination. In general, the model determines the development of inflation, real wages and the real exchange rate for any given rate of unemployment. Inflation, rather than unemployment, is the “conflict solver” in the unrestricted model. However, a supply side determined equilibrium rate of unemployment is subsumed as a special case. A re‐appraisal of the empirical literature shows that there is little evidence in support of the “natural rate” restrictions.

Noisy signals in target zone regimes: Theory and Monte Carlo experiments

Previous empirical evidence indicates that uncovered interest rate parity (UIP) does not hold for target zone exchange rates, like those in the European Monetary System and in the Nordic countries. We explore a target zone model where the market inferes the probability of a realignment of the band on the basis of a noisy signal. We show theoretically and through Monte Carlo simulations that if the market overrates the information content in the signal, then this may explain the empirical results obtained from testing UIP for target zone exchange rates.

Heuristic vs formal dynamics of the wage- and price-curve model of equilibrium unemployment

Purpose - – 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. The paper aims to discuss these issues. Design/methodology/approach - – The authors 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-interpreted as attractor relationships. Findings - – The authors 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 predetermined rate of unemployment. The authors 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”. Research limitations/implications - – To investigate the relevance of heuristical dynamics of influential macro models, explicit modelling of such dynamics is a necessary step. Practical implications - – An important argument against social orders that represent an attempt to target unemployment at relatively low levels, is refuted by the analysis. Social implications - – A high degree of employment is a main premise for a social order with equal income distribution and a drive for productivity growth. Originality/value - – It is important that economics give a balanced view of the possibility of attaining inflation stability at low or moderate levels of unemployment. This offering is contributions to establish such a balance.