Monopolistic Competition,Expected Inflation and Contract Length

Abstract. This paper shows that the explicit consideration of the “expected inflation effect” makes it more likely that increases in wage and price flexibility reduce employment variability. This result, obtained in a monopolistic competition model with synchronized contracts, casts doubts on some existing consensus in the literature pointing towards the opposite view. Wage and price flexibility, although ceteris paribus desirable, is however shown to be an inferior substitute for optimally designed demand management.