NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

The Inflation-Unemployment Trade-Off at Low Inflation

Pierpaolo Benigno, Luca Antonio Ricci

NBER Working Paper No. 13986
Issued in May 2008, Revised in December 2011
NBER Program(s):EFG, IFM, LS, ME

Wage setters take into account the future consequences of their current wage choices in the presence of downward nominal wage rigidities. Several interesting implications arise. First, a closed-form solution for a long-run Phillips curve relates average unemployment to average wage inflation; the curve is virtually vertical for high inflation rates but becomes flatter as inflation declines. Second, macroeconomic volatility shifts the Phillips curve outward, implying that stabilization policies can play an important role in shaping the trade-off. Third, nominal wages tend to be endogenously rigid also upward, at low inflation. Fourth, when inflation decreases, volatility of unemployment increases whereas the volatility of inflation decreases: this implies a long-run trade-off also between the volatility of unemployment and that of wage inflation.

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Document Object Identifier (DOI): 10.3386/w13986

Published: “The Inflation - Output Trade - Off with Downward Wage Rigidities,” The American Economic Review , V ol. 101, No. 4, pp. 1436 - 14 66, (2011) .

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