The Inflation-Output Trade-off with Downward Wage Rigidities

Pierpaolo Benigno and Luca Ricci

No 1020, EIEF Working Papers Series from Einaudi Institute for Economics and Finance (EIEF)

Abstract: In the presence of downward nominal wage rigidities, wage setters take into account the future consequences of their current wage choices, when facing both idiosyncratic and aggregate shocks. We derive a closed-form solution for a longrun Phillips curve which relates average output gap to average wage inflation: it is virtually vertical at high inflation and flattens at low inflation. Macroeconomic volatility shifts the curve outwards and reduces output. The results imply that stabilization policies play an important role, and that optimal inflation may be positive and differ across countries with different macroeconomic volatility.

Pages: 41 pages
Date: 2010, Revised 2010-04
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Citations: View citations in EconPapers (4)

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Related works:
Journal Article: The Inflation-Output Trade-Off with Downward Wage Rigidities (2011)
Working Paper: The Inflation-Output Trade-off with Downward Wage Rigidities (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:eie:wpaper:1020

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