Working Paper: NBER ID: w13986
Authors: Pierpaolo Benigno; Luca Antonio Ricci
Abstract: Wage setters take into account the future consequences of their current wage choices in the presence of downward nominal wage rigidities. Several interesting implications arise. First, a closed-form solution for a long-run Phillips curve relates average unemployment to average wage inflation; the curve is virtually vertical for high inflation rates but becomes flatter as inflation declines. Second, macroeconomic volatility shifts the Phillips curve outward, implying that stabilization policies can play an important role in shaping the trade-off. Third, nominal wages tend to be endogenously rigid also upward, at low inflation. Fourth, when inflation decreases, volatility of unemployment increases whereas the volatility of inflation decreases: this implies a long-run trade-off also between the volatility of unemployment and that of wage inflation.
Keywords: Inflation; Unemployment; Wage Rigidity; Phillips Curve; Macroeconomic Volatility
JEL Codes: E0; E24; E30
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| downward nominal wage rigidities (J31) | wage inflation (J31) |
| downward nominal wage rigidities (J31) | unemployment rates (J64) |
| inflation (E31) | unemployment (J64) |
| macroeconomic volatility (E32) | Phillips curve (E31) |
| inflation decrease (E31) | volatility of unemployment (J64) |
| inflation decrease (E31) | volatility of inflation (E31) |
| stabilization policies (E63) | inflation rates (E31) |