I disagree with Rudy F about inflation being a mechanism that lowers real
wages, either logically or historically. Logically, of course, the circular
flow indicates that aggregate purchasing power remains unaffected, and the
main distributional effect of greater-than-expected inflation will be from net
creditors to net debtors. Historically--well, plot the rate of change of real
wages against price inflation during the post-war period. What do you see?
Of course, if there are constraints against lowering nominal wages (a taboo
that has been dropping before our eyes) at least some inflation is required to
cut real wages. (This is not exactly true: a change in the composition of
wages can do this without price level changes.) But there is no reason that
*more* inflation should be associated with *more* reduction in real wages. As
I mentioned before during an exchange on AS-AD, I regard the battle against
money illusion (both types) to be a major task of intro macro. Any argument
that complicates it should be looked at very closely...
Peter Dorman
