Real Wage Rigidities and the Cost of Disinflations

Guido Ascari () and Christian P. Merkl

Journal of Money, Credit and Banking, 2009, vol. 41, issue 2-3, pages 417-435

Abstract: This paper analyzes the cost of disinflations under real wage rigidities in a micro-founded New Keynesian model. The conventional view is that real wage rigidities can be a useful mechanism to generate a slump in output after a credible disinflationary policy because they prevent the immediate adjustment of inflation. This view is flawed, since it depends on analyzing the model in a linearized framework. Once nonlinearities are taken into account, the results change both qualitatively and quantitatively. Disinflations actually lead to a permanently higher level of output, and real wage rigidities increase the output during the adjustment to the new steady state. Copyright (c) 2009 The Ohio State University.

Date: 2009
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Working Paper: Real Wage Rigidities and the Cost of Disinflations (2007)
Working Paper: Real Wage Rigidities and the Cost of Disinflations (2007)
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Persistent link: http://EconPapers.repec.org/RePEc:mcb:jmoncb:v:41:y:2009:i:2-3:p:417-435

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