The Inflation-Output Trade-off with Downward Wage Rigidities

Pierpaolo Benigno and Luca Ricci

No 15762, NBER Working Papers from National Bureau of Economic Research, Inc

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 long-run 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 outward 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.

JEL-codes: E24 E3 E30 E5 E50 (search for similar items in EconPapers)
Date: 2010-02
New Economics Papers: this item is included in nep-cba, nep-lab and nep-mac
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Published as Pierpaolo Benigno & Luca Antonio Ricci, 2011. "The Inflation-Output Trade-Off with Downward Wage Rigidities," American Economic Review, American Economic Association, vol. 101(4), pages 1436-66, June.

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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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