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Real Wage Rigidities and the Cost of Disinflations

Listed author(s):
  • GUIDO ASCARI
  • CHRISTIAN MERKL

This paper analyzes the cost of disinflations under real wage rigidities in a micro-founded New Keynesian model. The conventional view is that real wage rigidities can be a useful mechanism to generate a slump in output after a credible disinflationary policy because they prevent the immediate adjustment of inflation. This view is flawed, since it depends on analyzing the model in a linearized framework. Once nonlinearities are taken into account, the results change both qualitatively and quantitatively. Disinflations actually lead to a permanently higher level of output, and real wage rigidities increase the output during the adjustment to the new steady state. Copyright (c) 2009 The Ohio State University.

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File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/j.1538-4616.2009.00211.x
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Article provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.

Volume (Year): 41 (2009)
Issue (Month): 2-3 (March)
Pages: 417-435

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Handle: RePEc:mcb:jmoncb:v:41:y:2009:i:2-3:p:417-435
Contact details of provider: Web page: http://www.blackwellpublishing.com/journal.asp?ref=0022-2879

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