How Do Nominal and Real Rigidities Interact? A Tale of the Second Best

Romain Duval and Lukas Vogel

Journal of Money, Credit and Banking, 2012, vol. 44, issue 7, 1455-1474

Abstract: This paper analyzes the importance of real wage rigidities, in particular through their interaction with price stickiness, in a New Keynesian model. Real wage rigidities result from a combination of staggered wage setting and partial indexation of nonreset wages to past inflation. Blanchard and Galí (2007) show real rigidities to introduce a trade‐off between stabilizing inflation and the welfare‐relevant output gap. The present paper complements their findings by showing that the welfare costs 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, higher price stickiness can be welfare enhancing.

Date: 2012
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https://doi.org/10.1111/j.1538-4616.2012.00540.x

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Journal Article: How Do Nominal and Real Rigidities Interact? A Tale of the Second Best (2012)
Working Paper: How do nominal and real rigidities interact? A tale of the second best (2007)
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Persistent link: https://EconPapers.repec.org/RePEc:wly:jmoncb:v:44:y:2012:i:7:p:1455-1474

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