The Inflation-Output Trade-Off with Downward Wage Rigidities

40 Pages Posted: 22 Feb 2010 Last revised: 28 Jul 2010

See all articles by Pierpaolo Benigno

Pierpaolo Benigno

Luiss Guido Carli University; Einaudi Institute for Economics and Finance (EIEF)

Luca A. Ricci

International Monetary Fund (IMF) - Research Department

Date Written: February 2010

Abstract

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.

Suggested Citation

Benigno, Pierpaolo and Ricci, Luca Antonio, The Inflation-Output Trade-Off with Downward Wage Rigidities (February 2010). NBER Working Paper No. w15762, Available at SSRN: https://ssrn.com/abstract=1556126

Pierpaolo Benigno (Contact Author)

Luiss Guido Carli University

Viale Romania 32
Rome, Roma 00197
Italy

Einaudi Institute for Economics and Finance (EIEF) ( email )

Via Due Macelli, 73
Rome, 00187
Italy

Luca Antonio Ricci

International Monetary Fund (IMF) - Research Department ( email )

700 19th Street NW
Washington, DC 20431
United States
202-623-6007 (Phone)
202-623-4072 (Fax)

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