Real Wage Rigidities and the Cost of Disinflations |
| |
Authors: | GUIDO ASCARI CHRISTIAN MERKL† |
| |
Institution: | Guido Ascari;is from the Department of Economics and Quantitative Methods, University of Pavia, Via San Felice 5, 27100 PAVIA, Italy (E-mail: ). Christian Merkl;is an Economist, Kiel Institute for the World Economy (IfW), Düsternbrooker Weg 120, 24105 KIEL, Germany (E-mail: ). |
| |
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. |
| |
Keywords: | E31 E50 |
|
|