Research Seminar - Renato Faccini (Danmarks Nationalbank) - Beyond the Phillips curve trade-off: How to decrease inflation while increasing aggregate demand

Co-authors: Saman Darougheh (Danmarks Nationalbank) and Leonardo Melosi (University of Warwick) 

We develop a New Keynesian job-ladder model with endogenous on-the-job search and sequential auction bargaining. In this framework, an income tax, which is redistributed back to households as a lump-sum, decreases inflation while increasing aggregate demand. That is because income taxes reduce the incentives to search-on-the job, implying that bidding wars between firms to retain staff become less likely. As a result, wage costs fall and job creation rises. Moreover, the fall in the share of employed job seekers, also implies that a larger proportion of unemployed is brought into the production system. Using Danish administrative data, we provide some (preliminary) evidence on wage growth dynamics that is consistent with the predictions of the theoretical model.


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