IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Log in (now much improved!) to save this paper

How do nominal and real rigidities interact? A tale of the second best

  • Duval, Romain
  • Vogel, Lukas

This paper analyses the importance of real wage rigidities, in particular through their interaction with price stickiness, for optimal monetary policy in a calibrated small open economy DSGE model including oil in production and consumption. Blanchard and Galí (2007a) show real rigidities to introduce a trade-off between stabilising inflation and the welfare-relevant output gap. The present paper complements their findings by showing that the welfare cost of real rigidities can be substantial compared to nominal frictions. In a typical “tale of the second best”, we also show that in the presence of real wage rigidities, price stickiness can be welfare-enhancing.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: https://mpra.ub.uni-muenchen.de/7282/1/MPRA_paper_7282.pdf
File Function: original version
Download Restriction: no

File URL: https://mpra.ub.uni-muenchen.de/27362/1/MPRA_paper_27362.pdf
File Function: revised version
Download Restriction: no

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 7282.

as
in new window

Length:
Date of creation: 31 Oct 2007
Date of revision:
Handle: RePEc:pra:mprapa:7282
Contact details of provider: Postal:
Ludwigstraße 33, D-80539 Munich, Germany

Phone: +49-(0)89-2180-2459
Fax: +49-(0)89-2180-992459
Web page: https://mpra.ub.uni-muenchen.de

More information through EDIRC

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Jinill Kim & Sunghyun Henry Kim, 2007. "Two pitfalls of linearization methods," Finance and Economics Discussion Series 2007-64, Board of Governors of the Federal Reserve System (U.S.).
  2. Christoffel, Kai & Linzert, Tobias, 2005. "The role of real wage rigidity and labor market frictions for unemployment and inflation dynamics," Working Paper Series 0556, European Central Bank.
  3. Sylvain Leduc & Keith Sill, 2003. "Monetary policy, oil shocks, and TFP: accounting for the decline in U.S. volatility," Working Papers 03-22, Federal Reserve Bank of Philadelphia.
  4. Andrew T. Levin & Alexei Onatski & John Williams & Noah M. Williams, 2006. "Monetary Policy Under Uncertainty in Micro-Founded Macroeconometric Models," NBER Chapters, in: NBER Macroeconomics Annual 2005, Volume 20, pages 229-312 National Bureau of Economic Research, Inc.
  5. Werner Roeger, 2005. "International oil price changes: impact of oil prices on growth and inflation in the EU/OECD," International Economics and Economic Policy, Springer, vol. 2(1), pages 15-32, 06.
  6. Olivier Jean Blanchard & Jordi Galí, 2005. "Real wage rigidities and the New Keynesian model," Working Papers 05-14, Federal Reserve Bank of Boston.
  7. Martin Bodenstein & Christopher J. Erceg & Luca Guerrieri, 2008. "Optimal monetary policy with distinct core and headline inflation rates," International Finance Discussion Papers 941, Board of Governors of the Federal Reserve System (U.S.).
  8. Faia, Ester, 2007. "Ramsey monetary policy with labour market frictions," Working Paper Series 0707, European Central Bank.
  9. Galí, Jordi & Monacelli, Tommaso, 2002. "Monetary Policy and Exchange Rate Volatility in a Small Open Economy," CEPR Discussion Papers 3346, C.E.P.R. Discussion Papers.
  10. Kim, Jinill & Kim, Sunghyun Henry, 2003. "Spurious welfare reversals in international business cycle models," Journal of International Economics, Elsevier, vol. 60(2), pages 471-500, August.
  11. Olivier J. Blanchard & Jordi Gali, 2007. "The Macroeconomic Effects of Oil Shocks: Why are the 2000s So Different from the 1970s?," NBER Working Papers 13368, National Bureau of Economic Research, Inc.
  12. Aubhik Khan & Robert G. King & Alexander L. Wolman, 2002. "Optimal Monetary Policy," NBER Working Papers 9402, National Bureau of Economic Research, Inc.
  13. Filippo Altissimo & Michael Ehrmann & Frank Smets, 2006. "Inflation persistence and price-setting behaviour in the euro area – a summary of the IPN evidence," Occasional Paper Series 46, European Central Bank.
  14. Alessia Campolmi, 2006. "Which inflation to target? A small open economy with sticky wages indexed to past inflation," Economics Working Papers 961, Department of Economics and Business, Universitat Pompeu Fabra.
  15. David K. Backus & Mario J. Crucini, 1998. "Oil Prices and the Terms of Trade," NBER Working Papers 6697, National Bureau of Economic Research, Inc.
  16. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
  17. Rajeev Dhawan & Karsten Jeske, 2007. "Taylor rules with headline inflation: a bad idea," FRB Atlanta Working Paper 2007-14, Federal Reserve Bank of Atlanta.
  18. Vincent Bodart & Olivier Pierrard & Henri R. Sneessens, 2005. "Calvo Wages in a Search Unemployment Model," DNB Working Papers 068, Netherlands Central Bank, Research Department.
  19. Andrew Atkeson & Patrick J. Kehoe, 1994. "Models of Energy Use: Putty-Putty versus Putty-Clay," NBER Working Papers 4833, National Bureau of Economic Research, Inc.
  20. Mark Bils & Peter J. Klenow, 2002. "Some Evidence on the Importance of Sticky Prices," NBER Working Papers 9069, National Bureau of Economic Research, Inc.
  21. Pierdzioch, Christian & Kamps, Christophe, 2002. "Monetary Policy Rules and Oil Price Shocks," Kiel Working Papers 1090, Kiel Institute for the World Economy (IfW).
  22. Taylor, John B., 1999. "Staggered price and wage setting in macroeconomics," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 15, pages 1009-1050 Elsevier.
  23. Pierpaolo Benigno & Michael Woodford, 2004. "Inflation Stabilization and Welfare: The Case of a Distorted Steady State," NBER Working Papers 10838, National Bureau of Economic Research, Inc.
  24. Alfonso Arpaia & Karl Pichelmann, 2007. "Nominal and real wage flexibility in EMU," European Economy - Economic Papers 2008 - 2015 281, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
  25. Fiorella de Fiore & Giovenni Lombardo & Viktors Stebunovs, 2006. "Oil Price Shocks, Monetary Policy Rules and Welfare," Computing in Economics and Finance 2006 402, Society for Computational Economics.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:7282. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Joachim Winter)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.