The Inflation-Unemployment Trade-off at Low Inflation

March 1, 2009

Preview Citation

Format: Chicago

Luca A Ricci, and Pierpaolo Benigno. The Inflation-Unemployment Trade-off at Low Inflation, (USA: International Monetary Fund, 2009) accessed October 6, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

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.

Subject: Inflation, Unemployment, Unemployment rate, Wage rigidity, Wages

Keywords: Inflation rate, Phillips curve, WP

Publication Details

Pages:

46
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2009/034
Stock No:

WPIEA2009034
ISBN:

9781451871814
ISSN:

1018-5941

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