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  5. The Inflation-Output Trade-Off with Downward Wage Rigidities

American Economic Review

ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)

The Inflation-Output Trade-Off with Downward Wage Rigidities

  • Pierpaolo Benigno
  • Luca Antonio Ricci
American Economic Review
vol. 101, no. 4, June 2011
(pp. 1436–66)
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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. (JEL E23, E24, E31, E63)

Citation

Benigno, Pierpaolo, and Luca Antonio Ricci. 2011. "The Inflation-Output Trade-Off with Downward Wage Rigidities." American Economic Review, 101 (4): 1436–66. DOI: 10.1257/aer.101.4.1436

Additional Materials

JEL Classification

  • E23 Macroeconomics: Production
  • E24 Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital
  • E31 Price Level; Inflation; Deflation
  • E63 Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy