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Disinflationary boom in a price-wage spiral model

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  • Olivier Musy
  • Jean-Christophe Pereau

Abstract

This paper analyses the impact of the disinflation policy timing on the sign and the magnitude of the sacrifice ratio in a modified price and wage staggered model of Blanchard (1986). When wages are updated every four quarters and prices every two quarters, we show that a “cold-turkey” disinflation is associated to an output boom when the policy is implemented during the last period of life of the wage contract and a recession the other quarters.

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Bibliographic Info

Paper provided by University of Paris West - Nanterre la Défense, EconomiX in its series EconomiX Working Papers with number 2009-36.

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Length: 19 pages
Date of creation: 2009
Date of revision:
Handle: RePEc:drm:wpaper:2009-36

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Keywords: Disinflation policy; Shock timing; Sacrifice ratio; Price and wage staggered contracts.;

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  1. N. Gregory Mankiw & Ricardo Reis, 2001. "Sticky Information Versus Sticky Prices: A Proposal to Replace the New Keynesian Phillips Curve," NBER Working Papers 8290, National Bureau of Economic Research, Inc.
  2. Laurence Ball, 1994. "What Determines the Sacrifice Ratio?," NBER Chapters, in: Monetary Policy, pages 155-193 National Bureau of Economic Research, Inc.
  3. repec:nbr:nberre:0126 is not listed on IDEAS
  4. Dickens, William T. & Götte, Lorenz & Groshen, Erica L. & Holden, Steinar & Messina, Julián & Schweitzer, Mark E. & Turunen, Jarkko & Ward-Warmedinger, Melanie, 2006. "How wages change: micro evidence from the International Wage Flexibility Project," Working Paper Series, European Central Bank 0697, European Central Bank.
  5. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, Elsevier, vol. 12(3), pages 383-398, September.
  6. Mark Bils & Peter J. Klenow, 2004. "Some Evidence on the Importance of Sticky Prices," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 112(5), pages 947-985, October.
  7. Blanchard, Olivier Jean & Kiyotaki, Nobuhiro, 1987. "Monopolistic Competition and the Effects of Aggregate Demand," American Economic Review, American Economic Association, American Economic Association, vol. 77(4), pages 647-66, September.
  8. Giovanni Olivei & Silvana Tenreyro, 2006. "The Timing of Monetary Policy Shocks," CEP Discussion Papers dp0725, Centre for Economic Performance, LSE.
  9. Olivei, Giovanni & Tenreyro, Silvana, 2010. "Wage-setting patterns and monetary policy: International evidence," Journal of Monetary Economics, Elsevier, Elsevier, vol. 57(7), pages 785-802, October.
  10. Taylor, John B., 1999. "Staggered price and wage setting in macroeconomics," Handbook of Macroeconomics, Elsevier, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 15, pages 1009-1050 Elsevier.
  11. Luca Guerrieri, 2002. "The inflation persistence of staggered contracts," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 734, Board of Governors of the Federal Reserve System (U.S.).
  12. Musy, Olivier, 2006. "Inflation persistence and the real costs of disinflation in staggered prices and partial adjustment models," Economics Letters, Elsevier, Elsevier, vol. 91(1), pages 50-55, April.
  13. Taylor, John B, 1980. "Aggregate Dynamics and Staggered Contracts," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 88(1), pages 1-23, February.
  14. Ball, Laurence, 1995. "Disinflation with imperfect credibility," Journal of Monetary Economics, Elsevier, Elsevier, vol. 35(1), pages 5-23, February.
  15. Filippo Altissimo & Michael Ehrmann & Frank Smets, 2006. "Inflation persistence and price-setting behaviour in the euro area – a summary of the IPN evidence," Occasional Paper Series 46, European Central Bank.
  16. Peter N. Ireland, 1995. "Optimal disinflationary paths," Working Paper, Federal Reserve Bank of Richmond 95-01, Federal Reserve Bank of Richmond.
  17. Laurence Ball, 1990. "Credible Disinflation with Staggered Price Setting," NBER Working Papers 3555, National Bureau of Economic Research, Inc.
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