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The Real Effects of Credible Disinflation in the Presence of Real Wage Rigidities

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  • Mewael F. Tesfaselassie

Abstract

The paper re‐examines the real effects of credible disinflation in the presence of real wage rigidities and non‐linear dynamics. A credible, gradual disinflation is shown to lead to a delayed output slump along the transition path if real wage rigidities are sufficiently strong. This result is novel and holds across alternative models of nominal inertia—price staggering and price adjustment costs. In the special case of a cold‐turkey disinflation, price adjustment costs imply an immediate but short‐lived slump while price staggering implies a long‐lasting boom.

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  • Mewael F. Tesfaselassie, 2019. "The Real Effects of Credible Disinflation in the Presence of Real Wage Rigidities," Economica, London School of Economics and Political Science, vol. 86(344), pages 728-749, October.
  • Handle: RePEc:bla:econom:v:86:y:2019:i:344:p:728-749
    DOI: 10.1111/ecca.12288
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