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Money Wage Rigidity, Monopoly Power and Hysteresis

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Path Dependency and Macroeconomics

Part of the book series: International Papers in Political Economy Series ((IPPE))

Abstract

The literature that addresses the effects on the level of aggregate demand of changes in the degree of monopoly typically assumes away the existence of an ‘inflation barrier’ and an inflation-targeting central bank. The presence of these two institutional factors entails that any aggregate demand change brought about by changes in the functional distribution of income will tend to be offset by changes in real interest rates. We postulate a simple macroeconomic model for a closed economy with a government sector and hypothesize that a change in the average markup affects the inflation rate, the ‘inflation-barrier’ and aggregate demand. The model allows for the analysis of the effects on the employment rate of demand and supply shocks when the economy exhibits asymmetric inflation dynamics (AID) and hysteresis effects. Among other results we find that, if the economy exhibits AID and hysteresis, the effect on the employment rate of a change in the mark up is likely to be either ineffectual or counterproductive even if the associated demand shock is expansionary. We also show that an inadequate functional distribution of income may lead to the occurrence of an aggregate demand deficiency problem.

The author would like to thank Engelbert Stockhammer as well as the participants in the 5th International Conference ‘Developments in Economic Theory and Policy’, held at the University of the Basque Country in Bilbao (Spain) in July 2008, for their comments and suggestions on a previous draft of this chapter. Of course, the usual disclaimer applies.

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Author information

Authors and Affiliations

  1. Universidad Complutense de Madrid, Spain

    Alfonso Palacio-Vera

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  1. Alfonso Palacio-Vera
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Editors and Affiliations

  1. Department of Land Economy, University of Cambridge, UK

    Philip Arestis (University Director of Research, Cambridge Centre for Economics and Public Policy) (University Director of Research, Cambridge Centre for Economics and Public Policy)

  2. Leeds University Business School, University of Leeds, UK

    Malcolm Sawyer (Professor of Economics) (Professor of Economics)

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© 2009 Alfonso Palacio-Vera

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Palacio-Vera, A. (2009). Money Wage Rigidity, Monopoly Power and Hysteresis. In: Arestis, P., Sawyer, M. (eds) Path Dependency and Macroeconomics. International Papers in Political Economy Series. Palgrave Macmillan, London. https://doi.org/10.1057/9780230251090_5

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