How do nominal and real rigidities interact? A tale of the second best

Romain Duval and Lukas Vogel

MPRA Paper from University Library of Munich, Germany

Abstract: This paper analyses the importance of real wage rigidities, in particular through their interaction with price stickiness, for optimal monetary policy in a calibrated small open economy DSGE model including oil in production and consumption. Blanchard and Galí (2007a) show real rigidities to introduce a trade-off between stabilising inflation and the welfare-relevant output gap. The present paper complements their findings by showing that the welfare cost of real rigidities can be substantial compared to nominal frictions. In a typical “tale of the second best”, we also show that in the presence of real wage rigidities, price stickiness can be welfare-enhancing.

Keywords: DSGE model; price stickiness; real wage rigidity; oil price shocks (search for similar items in EconPapers)
JEL-codes: E30 F41 Q43 (search for similar items in EconPapers)
Date: 2007-10-31
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac, nep-mon and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

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https://mpra.ub.uni-muenchen.de/7282/1/MPRA_paper_7282.pdf original version (application/pdf)
https://mpra.ub.uni-muenchen.de/27362/1/MPRA_paper_27362.pdf revised version (application/pdf)

Related works:
Journal Article: How Do Nominal and Real Rigidities Interact? A Tale of the Second Best (2012)
Journal Article: How Do Nominal and Real Rigidities Interact? A Tale of the Second Best (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:7282

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