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Title:Real wage rigidities and the cost of disinflations
Authors:Ascari, Guido
Merkl, Christian
Issue Date:2009
Citation:[Volume:] 41 [Issue:] 2 [Pages:] 417-435 [Journal:] Journal of money, credit and banking : JMCB [ISBN:] 0022-2879
Abstract:This paper analyzes the cost of disinflations under real wage rigidities in a micro-founded New Keynesian model. The conventional view is that real wage rigidities can be a useful mechanism to generate a slump in output after a credible disinflationary policy because they prevent the immediate adjustment of inflation. This view is flawed, since it depends on analyzing the model in a linearized framework. Once nonlinearities are taken into account, the results change both qualitatively and quantitatively. Disinflations actually lead to a permanently higher level of output, and real wage rigidities increase the output during the adjustment to the new steady state.
Subjects:disinflation
sticky prices
real wage rigidities
nonlinearities
JEL:E31
E50
Persistent Identifier of the first edition:doi:10.1111/j.1538-4616.2009.00211.x
Document Type:Article
Appears in Collections:Economists Online

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