Real Wage Rigidities and the New Keynesian Model

Olivier Blanchard () and Jordi Gali ()

No 11806, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Most central banks perceive a trade-off between stabilizing inflation and stabilizing the gap between output and desired output. However, the standard new Keynesian framework implies no such trade-off. In that framework, stabilizing inflation is equivalent to stabilizing the welfare-relevant output gap. In this paper, we argue that this property of the new Keynesian framework, which we call the "divine coincidence", is due to a special feature of the model: the absence of non trivial real imperfections. We focus on one such real imperfection, namely, real wage rigidities. When the baseline new Keynesian model is extended to allow for real wage rigidities, the divine coincidence disappears, and central banks indeed face a trade-off between stabilizing inflation and stabilizing the welfare-relevant output gap. We show that not only does the extended model have more realistic normative implications, but it also has appealing positive properties. In particular, it provides a natural interpretation for the dynamic inflation--unemployment relation found in the data.

JEL-codes: E32 E50 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mac
Date: Written
Note: EFG ME
View list of references View citations in EconPapers

Downloads: (external link)
http://www.nber.org/papers/w11806.pdf (application/pdf)
Access to the full text is generally limited to series subscribers, however if the top level domain of the client browser is in a developing country or transition economy free access is provided. More information about subscriptions and free access is available at http://www.nber.org/wwphelp.html.

Related works:
Working Paper: Real Wage Rigidities and the New Keynesian Model (2005)
Working Paper: Real wage rigidities and the New Keynesian model (2005)
Working Paper: Real Wage Rigidities and the New Keynesian Model (2005)
Journal Article: Real Wage Rigidities and the New Keynesian Model (2007)
Journal Article: Real wage rigidities and the New Keynesian model (2005)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: http://EconPapers.repec.org/RePEc:nbr:nberwo:11806

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w11806
The price is Paper copy available by mail.

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc
Address: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
Contact information at EDIRC.
Series data maintained by ().