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Staggered wages and output dynamics under disinflation

  • Ascari, Guido
  • Rankin, Neil

We study the output costs of a reduction in monetary growth in a dynamic general equilibrium model with staggered wages. The money wage is fixed for two periods, and is chosen according to intertemporal optimization. Agents have labour market monopoly power. We show that the introduction of microfoundations helps to resolve the puzzle raised by directly postulated models, 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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Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 26 (2002)
Issue (Month): 4 (April)
Pages: 653-680

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Handle: RePEc:eee:dyncon:v:26:y:2002:i:4:p:653-680
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  19. Blanchard, Olivier Jean & Summers, Lawrence H, 1988. "Beyond the Natural Rate Hypothesis," American Economic Review, American Economic Association, vol. 78(2), pages 182-87, May.
  20. Ireland, Peter N., 1995. "Optimal disinflationary paths," Journal of Economic Dynamics and Control, Elsevier, vol. 19(8), pages 1429-1448, November.
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