ratchet effect

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A tendency for a variable to be influenced by its own largest previous value. For example, consumption from any given income may be higher, the higher the previous peak consumption level; or the real wages demanded by trade unions may be an increasing function of the highest real wage previously attained. The ratchet effect implies that variables are more sticky in one direction than the other. A ratchet effect may make inflation hard to stop, if varying speeds of adjustment have led to a situation where the sum of past peak real incomes of all sections of the community is considerably greater than the present total available.

Subjects: Economics.

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