Can loss aversion shed light on the deflation puzzle?

Jeanette Lye and Ian McDonald ()

CAMA Working Papers from Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University

Abstract: This paper argues that the application of loss aversion to wage determination can explain the deflation puzzle: the failure of persistently high unemployment to exert a persistent downward impact on the rate of inflation in money wages. This is an improvement on other theories of the deflation puzzle which simply assume downward wage rigidity; which are the hysteresis theory, the lubrication theory and the efficiency wage theory. The paper presents estimates that support the loss aversion explanation of the deflation puzzle for both the US and Australia. Furthermore, our estimation approach gives a more precise estimate of the potential rate of unemployment than does the natural rate approach and reveals a potential rate of unemployment for the US and Australia at the current time (end of 2017) of about 4% and 3.3% respectively.

Keywords: unemployment; inflation; Phillips curve; hysteresis; loss aversion; behavioural macroeconomics (search for similar items in EconPapers)
JEL-codes: E12 E24 E31 E71 (search for similar items in EconPapers)
Pages: 36 pages
Date: 2019-06
New Economics Papers: this item is included in nep-mac and nep-upt
References: Add references at CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
https://cama.crawford.anu.edu.au/sites/default/fil ... 019_lye_mcdonald.pdf (application/pdf)

Related works:
Journal Article: Can loss aversion shed light on the deflation puzzle? (2021)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:een:camaaa:2019-40

Access Statistics for this paper

More papers in CAMA Working Papers from Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University Contact information at EDIRC.
Bibliographic data for series maintained by Cama Admin ().