We study the output costs of a reduction in monetary growth in a dynamic general equilibrium model with staggered wages. As in John Taylor’s approach, the money wage is fixed for two periods, but in our model it is also chosen according to intertemporal optimization, as are consumption and money demand. Agents have labour market monopoly power. We show that the introduction of microfoundations helps to resolve the puzzle recently raised by Laurence Ball, namely that disinflation in staggered pricing models causes a boom. In our model disinflation, whether unanticipated or anticipated, unambiguously causes a slump.
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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number
1763.
Find related papers by JEL classification: E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
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