Downward nominal rigidity and monetary policy
This paper addresses the question of whether there is downward rigidity in money wages and prices. It is an issue that is relevant to the choice of the level of the inflation target, as it has been argued that targeting too low a level of inflation will be harmful when downward rigidities exist. The existence of such rigidities is questioned from a theoretical perspective on the basis of the very strict conditions that would have to apply. Also it is argued that concern for 'fairness' or the presence of 'money illusion' do not in themselves justify positive inflation. Empirical evidence is investigated and it is found that the existence of downward rigidities is not proven.
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