NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

The Inflation-Output Trade-off with Downward Wage Rigidities

Pierpaolo Benigno, Luca Antonio Ricci

NBER Working Paper No. 15762
Issued in February 2010
NBER Program(s):   EFG   LS   ME

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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Document Object Identifier (DOI): 10.3386/w15762

Published: 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.

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