Working Paper

Inflationary Inertia as a Result of Unfulfilled Aspirations

Working Paper By

Download paper


How inflationary inertia, driven by distributional conflict, disrupts the economy’s path to an effective demand equilibrium.

I develop a discrete-time Keynesian D/Z model in which inflationary inertia arises from distributional conflict between firms and workers. The mechanism centers on aspiration gaps— the divergence between actual real wages and income targets— which, when combined with strong bargaining power, generate persistent inflation even after conventional macroeconomic gaps close.

The model shows that equilibrium in real wages does not guarantee distributional balance, and that market mechanisms alone cannot restore stability. This underscores the need for a “social consensus” that moderates aspiration dynamics and defuses conflict-driven inflationary pressures.