Macroeconomics and Individual Decisionmaking.

• Position: Bureau News

The NBER's Working Group on Macroeconomics and Individual Decisionmaking, directed by George A. Akerlof University of California at Berkeley, and Robert J. Shiller, NBER and Yale University, met in Cambridge on November 3. The following papers were discussed:

John C. Driscoll, NBER and Brown University, and Steinar Holden, University of Oslo, "Fair Treatment and Inflation Persistence"

Discussant: Venkataraman Bhaskar, University of Essex

Jonathan Gardner and Andrew Oswald, Warwick University, "Does Money Buy Happiness? A Longitudinal Study Using Data on Windfalls"

Discussant: Alberto F. Alesina, NBER and Harvard University

N. Gregory Mankiw, NBER and Harvard University, and Ricardo Reis, Harvard University, "Sticky Information Versus Sticky Prices: A Proposal to Replace the New-Keynesian Phillips Curve"

Discussant: Xavier Gabaix, MIT

Laurence M. Ball and Robert A. Moffitt, NBER and Johns Hopkins University, "Productivity Growth and the Phillips Curve" (NBER Working Paper No. 8421)

Discussant: Pierre Fortin, Universite du Quebec a Montreal

David Laibson, NBER and Harvard University, Andrea Repetto, Universidad de Chile, and Jeremy B. Tobacman, Harvard University, "Wealth Accumulation, Credit Card Borrowing, and Consumption-Income Comovement"

Discussant: Robert B. Barsky, NBER and University of Michigan

Most wage-contracting models with rational expectations fail to replicate the persistence in inflation observed in the data. Driscoll and Holden develop a wage-contracting model in a setting following Bhaskar (1990) in which workers are concerned about being treated fairly: they care disproportionately more about being paid less than other identical workers than they care about being paid more than them. This model generates a number of equilibriums, where workers want to match the wage set by other workers. If workers' expectations are based on the past behavior of wage growth, these beliefs will be self-fulfilling and thus rational. Moreover, the multiplicity of equilibriums is consistent with the idea that there may be a natural range of unemployment, rather than a single natural rare. The authors estimate the model on quarterly U.S. data over the period 1955-2000. They find that the dynamics of the Phillips curve do change below unemployment rates of 4.7 and above rates of 6.5 percent.

The most fundamental idea in economics is that money makes people happy. Gardner and Oswald construct a test: they study longitudinal information on the...