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Downward Nominal Wage Rigidities Bend the Phillips Curve

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  • Mary C. Daly
  • Bart Hobijn

Abstract

We show that the existence of downward nominal wage rigidities bends the short-run wage Phillips curve. We introduce a model of monetary policy with downward nominal wage rigidities and show that both the slope and curvature of the Phillips curve depend on the level of inflation and the extent of downward nominal wage rigidities. This is true for the both the long-run and the short-run Phillips curve. Comparing simulation results from the model with data on U.S. wage changes since the onset of the Great Recession, we show that downward nominal wage rigidities have likely played a role in shaping the dynamics of unemployment and wage growth from 2006 through 2012.

Suggested Citation

  • Mary C. Daly & Bart Hobijn, 2013. "Downward Nominal Wage Rigidities Bend the Phillips Curve," Working Paper Series 2013-08, Federal Reserve Bank of San Francisco.
    • Handle: RePEc:fip:fedfwp:2013-08
    DOI: 10.24148/wp2013-08
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