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The Inflation-Output Trade-off with Downward Wage Rigidities

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  • Pierpaolo Benigno
  • Luca Antonio Ricci

Abstract

In the presence of downward nominal wage rigidities, wage setters take into account the future consequences of their current wage choices, when facing both idiosyncratic and aggregate shocks. We derive a closed-form solution for a long-run Phillips curve which relates average output gap to average wage inflation: it is virtually vertical at high inflation and flattens at low inflation. Macroeconomic volatility shifts the curve outward and reduces output. The results imply that stabilization policies play an important role, and that optimal inflation may be positive and differ across countries with different macroeconomic volatility.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 15762.

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Date of creation: Feb 2010
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Publication status: published as Pierpaolo Benigno & Luca Antonio Ricci, 2011. "The Inflation-Output Trade-Off with Downward Wage Rigidities," American Economic Review, American Economic Association, vol. 101(4), pages 1436-66, June.
Handle: RePEc:nbr:nberwo:15762

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Citations

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Cited by:
  1. Pierpaolo Benigno & Luca Antonio Ricci, 2010. "The Inflation-Output Trade-off with Downward Wage Rigidities," NBER Working Papers 15762, National Bureau of Economic Research, Inc.
  2. Abbritti, Mirko & Fahr, Stephan, 2011. "Macroeconomic implications of downward wage rigidities," Working Paper Series, European Central Bank 1321, European Central Bank.
  3. Nicola Acocella, . "A tale of two cities: exit policies in Washington and Frankfurt," Working Papers, Sapienza University of Rome, Metodi e modelli per l'economia, il territorio e la finanza MEMOTEF 117/13, Sapienza University of Rome, Metodi e modelli per l'economia, il territorio e la finanza MEMOTEF.
  4. Yeh, Chih-Chuan & Huang, Ho-Chuan (River) & Lin, Pei-Chien, 2013. "Financial structure on growth and volatility," Economic Modelling, Elsevier, Elsevier, vol. 35(C), pages 391-400.
  5. Ho-Chuan (River) Huang & Stephen M. Miller, 2012. "Banking Market Structure, Liquidity Needs, and Industrial Growth Volatility," Working Papers, University of Nevada, Las Vegas , Department of Economics 1206, University of Nevada, Las Vegas , Department of Economics.
  6. Benigno Pierpaolo & Surico Paolo & Ricci Luca Antonio, 2011. "Unemployment and productivity in the long run: The role of macroeconomic volatility," wp.comunite 0085, Department of Communication, University of Teramo.
  7. Ho-Chuan (River) Huang & Stephen M. Miller, . "Does Financial Development Volatility Affect Industrial Growth Volatility?," Working Papers, University of Nevada, Las Vegas , Department of Economics 1302, University of Nevada, Las Vegas , Department of Economics.
  8. Nicola Acocella, . "Teoria e pratica della politica economica: l’eredità del recente passato," Working Papers, Sapienza University of Rome, Metodi e modelli per l'economia, il territorio e la finanza MEMOTEF 104/13, Sapienza University of Rome, Metodi e modelli per l'economia, il territorio e la finanza MEMOTEF.
  9. Nicola Acocella, . "The theoretical roots of EMU institutions and policies during the crisis," Working Papers, Sapienza University of Rome, Metodi e modelli per l'economia, il territorio e la finanza MEMOTEF 126/14, Sapienza University of Rome, Metodi e modelli per l'economia, il territorio e la finanza MEMOTEF.
  10. de Carvalho Filho Irineu E, 2011. "28 Months Later: How Inflation Targeters Outperformed Their Peers in the Great Recession," The B.E. Journal of Macroeconomics, De Gruyter, De Gruyter, vol. 11(1), pages 1-46, July.
  11. Abbritti, Mirko & Fahr, Stephan, 2013. "Downward wage rigidity and business cycle asymmetries," Journal of Monetary Economics, Elsevier, Elsevier, vol. 60(7), pages 871-886.

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