Credible disinflation and delayed slumps under real wage rigidity

Mewael Tesfaselassie

No 1923, Kiel Working Papers from Kiel Institute for the World Economy (IfW Kiel)

Abstract: The paper studies the effects of credible disinflation in the presence of real wage rigidity, comparing the Calvo and Rotemberg price setting mechanisms (the two popular variants of the New-Keynesian model). In both types of models, a credible, gradual disinflation is shown to lead to a delayed slump in output along the transition path. The delayed-slump result is novel and owes to negative real wage growth along the transition path, whose effect is amplified by the degree of real wage rigidity.

Keywords: sticky prices; real wage rigidity; disinflation; nonlinear dynamics (search for similar items in EconPapers)
JEL-codes: E31 E50 (search for similar items in EconPapers)
Date: 2014
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:ifwkwp:1923

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