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American Economic Review: Vol. 101 No. 4 (June 2011)
AER Volume. 101, Issue 4 | 
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The Inflation-Output Trade-Off with Downward Wage Rigidities
Article 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
DOI: 10.1257/aer.101.4.1436
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)
Article Full-Text Access
Full-text Article
Additional Materials
Download Data Set (271.96 KB) | Online Appendix (82.13 KB)
Authors
Benigno, Pierpaolo (LUISS U "Guido Carli", Rome and EIEF)
Ricci, Luca Antonio (IMF)
Ricci, Luca Antonio (IMF)
JEL Classifications
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
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
