TREND INFLATION, RIGIDITIES, AND HUMAN CAPITAL GROWTH

Abstract

A wage setting process defined in terms of wage per hour is the key factor for obtaining negative optimal trend inflation in a closed economy. However, this inflation will be zero if the process is established on the wage per unit of human capital. The origin of both results is a dynamic mechanism that, with some differences, makes possible the attainment of a situation equivalent to wage flexibility. Finally, while the effect of trend inflation on the long-run growth rate is tiny in the first case, it is much more important in the second, highlighting the relevance of this approach.