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The Inflation-Output Trade-Off with Downward Wage Rigidities

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  • Pierpaolo Benigno
  • Luca Antonio Ricci

Abstract

The macroeconomic implications of downward nominal wage rigidities are analyzed via a dynamic stochastic general equilibrium model featuring aggregate and idiosyncratic shocks. A closed-form solution for a long-run Phillips curve relates average output gap to average wage inflation: it is virtually vertical at high inflation and flattens at low inflation. Macroeconomic volatility shifts the curve outwards and reduces output. The results imply that stabilization policies play an important role, and that optimal inflation may be positive and differ across countries with different macroeconomic volatility. Results are robust to relaxing the wage constraint, for example, when large idiosyncratic shocks arise. (JEL E23, E24, E31, E63)

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File URL: http://www.aeaweb.org/articles.php?doi=10.1257/aer.101.4.1436
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Bibliographic Info

Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 101 (2011)
Issue (Month): 4 (June)
Pages: 1436-66

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Handle: RePEc:aea:aecrev:v:101:y:2011:i:4:p:1436-66

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Citations

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Cited by:
  1. Nicola Acocella, . "A tale of two cities: exit policies in Washington and Frankfurt," Working Papers 117/13, Sapienza University of Rome, Metodi e modelli per l'economia, il territorio e la finanza MEMOTEF.
  2. Benigno Pierpaolo & Surico Paolo & Ricci Luca Antonio, 2011. "Unemployment and productivity in the long run: The role of macroeconomic volatility," wp.comunite 0085, Department of Communication, University of Teramo.
  3. Pierpaolo Benigno & Luca Antonio Ricci, 2010. "The Inflation-Output Trade-off with Downward Wage Rigidities," NBER Working Papers 15762, National Bureau of Economic Research, Inc.
  4. Yeh, Chih-Chuan & Huang, Ho-Chuan (River) & Lin, Pei-Chien, 2013. "Financial structure on growth and volatility," Economic Modelling, Elsevier, vol. 35(C), pages 391-400.
  5. Acocella Nicola, 2013. "Teoria e pratica della politica economica: l'eredità del recente passato," Rivista di storia economica, Società editrice il Mulino, issue 2, pages 223-248.
  6. Huang, Ho-Chuan (River) & Fang, WenShwo & Miller, Stephen M., 2014. "Does financial development volatility affect industrial growth volatility?," International Review of Economics & Finance, Elsevier, vol. 29(C), pages 307-320.
  7. Abbritti, Mirko & Fahr, Stephan, 2011. "Macroeconomic implications of downward wage rigidities," Working Paper Series 1321, European Central Bank.
  8. Ho-Chuan Huang & WenShwo Fang & Stephen M. Miller, 2012. "Banking Market Structure, Liquidity Needs, and Industrial Growth Volatility," Working papers 2012-26, University of Connecticut, Department of Economics.
  9. Nicola Acocella, . "The theoretical roots of EMU institutions and policies during the crisis," Working Papers 126/14, Sapienza University of Rome, Metodi e modelli per l'economia, il territorio e la finanza MEMOTEF.
  10. Abbritti, Mirko & Fahr, Stephan, 2013. "Downward wage rigidity and business cycle asymmetries," Journal of Monetary Economics, Elsevier, vol. 60(7), pages 871-886.
  11. de Carvalho Filho, Irineu, 2011. "28 Months Later: How Inflation Targeters Outperformed Their Peers in the Great Recession," MPRA Paper 29100, University Library of Munich, Germany.

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