Real Wage Rigidities and the Cost of Disinflations
AbstractThis paper analyzes the cost of disinflations under real wage rigidities in a micro-founded New Keynesian model. The consensus is that real wage rigidities can be a useful mechanism to induce the inflation persistence that is absent in the standard Calvo model. Real wage rigidities thus generate a slump in output after a credible disinflationary policy. This consensus is flawed, since it depends on analyzing the model in a linearized framework. Once nonlinearities are taken into account, the results change dramatically, both qualitatively and quantitatively. Real wage rigidities imply neither inflation persistence, nor output costs of disinflations. Real wage rigidities actually create a boom after a permanent reduction in the inflation target of the monetary policy.
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Bibliographic InfoPaper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 3049.
Length: 22 pages
Date of creation: Sep 2007
Date of revision:
Publication status: published in: Journal of Money, Credit, and Banking, 2009, 41 (2-3), 417-435
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Other versions of this item:
- Guido Ascari & Christian Merkl, 2009. "Real Wage Rigidities and the Cost of Disinflations," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 41(2-3), pages 417-435, 03.
- Guido Ascari & Christian Merkl, 2007. "Real Wage Rigidities and the Cost of Disinflations," Kiel Working Papers 1312, Kiel Institute for the World Economy.
- E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
- E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
This paper has been announced in the following NEP Reports:
- NEP-ALL-2007-10-06 (All new papers)
- NEP-CBA-2007-10-06 (Central Banking)
- NEP-MAC-2007-10-06 (Macroeconomics)
- NEP-MON-2007-10-06 (Monetary Economics)
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