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dc.contributor.authorBlanchard, Olivieren_US
dc.contributor.authorGalí, Jordien_US
dc.description.abstractMost central banks perceive a trade-off between stabilizing inflation and stabilizing the gap between output and desired output. However, the standard new Keynesian framework implies no such trade-off. In that framework, stabilizing inflation is equivalent to stabilizing the welfare-relevant output gap. In this paper, we argue that this property of the new Keynesian framework, which we call the divine coincidence, is due to a special feature of the model: the absence of nontrivial real imperfections. We focus on one such real imperfection, namely, real wage rigidities. When the baseline new Keynesian model is extended to allow for real wage rigidities, the divine coincidence disappears, and central banks indeed face a trade-off between stabilizing inflation and stabilizing the welfare-relevant output gap. We show that not only does the extended model have more realistic normative implications, but it also has appealing positive properties. In particular, it provides a natural interpretation for the dynamic inflation-unemployment relation found in the data.en_US
dc.publisher|aFederal Reserve Bank of Boston |cBoston, MAen_US
dc.relation.ispartofseries|aWorking paper series // Federal Reserve Bank of Boston |x05-14en_US
dc.subject.keywordoil price shocksen_US
dc.subject.keywordinflation targetingen_US
dc.subject.keywordmonetary policyen_US
dc.subject.keywordinflation inertiaen_US
dc.subject.stwGeldpolitisches Zielen_US
dc.titleReal wage rigidities and the new Keynesian modelen_US
dc.typeWorking Paperen_US

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