American Economic Review Vol. 101 No. 4 2011

The Inflation-Output Trade-Off with Downward Wage Rigidities

Pierpaolo Benigno¹; Luca Antonio Ricci²

¹ Dipartimento di Scienze Economiche e Aziendali, LUISS Guido Carli, Viale Romania 32, 00197 Roma, Italy, and EIEF. · ² Research Department, International Monetary Fund, 700 19th Street, N.W. Washington, DC 20431.

Abstract

The macroeconomic implications of downward nominal wage rigidities are analyzed via a dynamic stochastic general equilibrium model featuring aggregate and idiosyncratic shocks. A closed-form solution for a long-run Phillips curve 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 outwards 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. Results are robust to relaxing the wage constraint, for example, when large idiosyncratic shocks arise.

DOI

10.1257/aer.101.4.1436

Volume

101

Issue

4

Pages

1436-1466

Language

en

Sources

bibtex:phds-export.bib openalex crossref

Cite

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