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The Inflation-Output Trade-off with Downward Wage Rigidities

  • Pierpaolo Benigno
  • Luca Antonio Ricci

In the presence of downward nominal wage rigidities, wage setters take into account the future consequences of their current wage choices, when facing both idiosyncratic and aggregate shocks. We derive a closed-form solution for a long-run Phillips curve which relates average output gap to average wage inflation: it is virtually vertical at high inflation and flattens at low inflation. Macroeconomic volatility shifts the curve outward and reduces output. The results imply that stabilization policies play an important role, and that optimal inflation may be positive and differ across countries with different macroeconomic volatility.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 15762.

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Date of creation: Feb 2010
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Publication status: published as Pierpaolo Benigno & Luca Antonio Ricci, 2011. "The Inflation-Output Trade-Off with Downward Wage Rigidities," American Economic Review, American Economic Association, vol. 101(4), pages 1436-66, June.
Handle: RePEc:nbr:nberwo:15762
Note: EFG LS ME
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