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The Inflation-Unemployment Trade-Off at Low Inflation

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  • Pierpaolo Benigno
  • Luca Antonio Ricci

Abstract

Wage setters take into account the future consequences of their current wage choices in the presence of downward nominal wage rigidities. Several interesting implications arise. First, a closed-form solution for a long-run Phillips curve relates average unemployment to average wage inflation; the curve is virtually vertical for high inflation rates but becomes flatter as inflation declines. Second, macroeconomic volatility shifts the Phillips curve outward, implying that stabilization policies can play an important role in shaping the trade-off. Third, nominal wages tend to be endogenously rigid also upward, at low inflation. Fourth, when inflation decreases, volatility of unemployment increases whereas the volatility of inflation decreases: this implies a long-run trade-off also between the volatility of unemployment and that of wage inflation.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 13986.

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Date of creation: May 2008
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Publication status: published as “The Inflation - Output Trade - Off with Downward Wage Rigidities,” The American Economic Review , V ol. 101, No. 4, pp. 1436 - 14 66, (2011) .
Handle: RePEc:nbr:nberwo:13986

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Cited by:
  1. Kim, Jinill & Ruge-Murcia, Francisco J., 2007. "How Much Inflation is Necessary to Grease the Wheels?," Cahiers de recherche, Universite de Montreal, Departement de sciences economiques 2007-10, Universite de Montreal, Departement de sciences economiques.
  2. Farvaque, Etienne & Mihailov, Alexander, 2009. "Intergenerational Transmission of Inflation Aversion: Theory and Evidence," IRISS Working Paper Series, IRISS at CEPS/INSTEAD 2009-11, IRISS at CEPS/INSTEAD.
  3. KIM, Jinill & RUGE-MURCIA, Francisco J., 2009. "Monetary Policy When Wages Are Downwardly Rigid : Friedman Meets Tobin," Cahiers de recherche, Centre interuniversitaire de recherche en économie quantitative, CIREQ 15-2009, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
  4. Di Bartolomeo Giovanni & Tirelli Patrizio & Acocella Nicola, 2011. "Trend inflation, the labor market wedge, and the non-vertical Phillips curve," wp.comunite, Department of Communication, University of Teramo 0081, Department of Communication, University of Teramo.
  5. Pierpaolo Benigno & Luca Antonio Ricci, 2011. "The Inflation-Output Trade-Off with Downward Wage Rigidities," American Economic Review, American Economic Association, American Economic Association, vol. 101(4), pages 1436-66, June.
  6. Giovanni Di Bartolomeo & Patrizio Tirelli & Nicola Acocella, 2010. "Trend inflation, endogenous mark-ups and the non-vertical Phillips curve," Working Papers, University of Milano-Bicocca, Department of Economics 186, University of Milano-Bicocca, Department of Economics, revised May 2010.
  7. Di Bartolomeo Giovanni & Tirelli Patrizio & Acocella Nicola, 2011. "Inflation targets and endogenous wage markups in a New Keynesian model," wp.comunite, Department of Communication, University of Teramo 0079, Department of Communication, University of Teramo.
  8. Juan David Prada Sarmiento & Luis Eduardo Rojas Dueñas Author- Email: lrojasdu@banrep.gov.co, . "La elasticidad de Frisch y la transmisión de la política monetaria en Colombia," Borradores de Economia 555, Banco de la Republica de Colombia.
  9. Fagan, Gabriel & Messina, Julián, 2009. "Downward wage rigidity and optimal steady-state inflation," Working Paper Series, European Central Bank 1048, European Central Bank.

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