Working Paper: NBER ID: w15762
Authors: Pierpaolo Benigno; Luca Antonio Ricci
Abstract: In the presence of downward nominal wage rigidities, wage setters take into account the future \nconsequences of their current wage choices, when facing both idiosyncratic and aggregate shocks. We derive a closed-form solution for a long-run Phillips curve which 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 outward 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.
Keywords: downward nominal wage rigidities; Phillips curve; macroeconomic volatility; stabilization policies
JEL Codes: E24; E3; E30; E5; E50
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) | Phillips curve (vertical at high inflation rates) (E31) |
| macroeconomic volatility (E39) | Phillips curve (shifts outward) (E31) |
| Phillips curve (shifts outward) (E31) | output and employment (negative impacts) (F66) |
| stabilization policies (E63) | inflation-output tradeoff (improvement) (E31) |
| downward nominal wage rigidities (J31) | output costs of reducing inflation (increase) (E31) |