Models Of The Phillips Curve Vs Aggregate Supply Relationship Based On Flexible Wages

1231 WordsNov 21, 20165 Pages
Steven Tian Yi Zhang “Models of the Phillips curve/aggregate supply relationship based on flexible wages and prices fail to explain persistence in both the price level and inflation whereas those based on nominal rigidities readily explain both.“ Discuss. The statement that “models of the Phillips curve/aggregate supply relationship based on flexible wages and prices fail to explain persistence in both the price level and inflation whereas those based on nominal rigidities readily explain both” is false. If we define “flexible” wages and prices as wages or prices that can be adjusted during one period for certain if the price-setters want to do so, then there is at least one model that expanded upon the the concept of “flexible” prices that explains persistence in both the price level and inflation. In this essay, I will first briefly introduce the Lucas Island Model, which is one of the first “flexible” price models and does not explain persistence in price level and inflation, then outline the sticky-price model by Calvo, outline the sticky-information model by Mankiw and Reis, and then using findings from ManKiw and Reis’s 2002 paper to argue that the sticky information model - which is still a “flexible” price model as we defined - explains both the price persistence and inflation persistence. 1. The Lucas Island Model There are a group of N islands, with one individual on each island. Each individual produces quantity Y, which can be bought for some amount of money

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