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Real Wage Rigidities and the Cost of Disinflations

  • 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 (03)
Pages: 417-435

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Handle: RePEc:mcb:jmoncb:v:41:y:2009:i:2-3:p:417-435
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  1. Blanchard, Olivier J & Galí, Jordi, 2005. "Real Wage Rigidities and the New Keynesian Model," CEPR Discussion Papers 5375, C.E.P.R. Discussion Papers.
  2. Schmitt-Grohe, Stephanie & Uribe, Martin, 2007. "Optimal simple and implementable monetary and fiscal rules," Journal of Monetary Economics, Elsevier, vol. 54(6), pages 1702-1725, September.
  3. Ascari, Guido, 2002. "Staggered Price and Trend Inflation:Some Nuisances," Royal Economic Society Annual Conference 2002 10, Royal Economic Society.
  4. Laurence Ball, 1990. "Credible Disinflation with Staggered Price Setting," NBER Working Papers 3555, National Bureau of Economic Research, Inc.
  5. Ascari, G. & Rankin, N., 2000. "Staggered Wages and Output Dynamics under Disinflation," The Warwick Economics Research Paper Series (TWERPS) 557, University of Warwick, Department of Economics.
  6. V. V. Chari & Patrick J. Kehoe & Ellen R. McGrattan, 2000. "Sticky Price Models of the Business Cycle: Can the Contract Multiplier Solve the Persistence Problem?," Econometrica, Econometric Society, vol. 68(5), pages 1151-1180, September.
  7. Mark Bils & Peter J. Klenow, 2002. "Some Evidence on the Importance of Sticky Prices," NBER Working Papers 9069, National Bureau of Economic Research, Inc.
  8. Graham, Liam & Snower, Dennis J., 2004. "The real effects of money growth in dynamic general equilibrium," Working Paper Series 0412, European Central Bank.
  9. Juillard, Michel, 1996. "Dynare : a program for the resolution and simulation of dynamic models with forward variables through the use of a relaxation algorithm," CEPREMAP Working Papers (Couverture Orange) 9602, CEPREMAP.
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