## The Inflation-Unemployment Trade-off at Low Inflation

_IMF Working Papers, March 1, 2009_

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## Bibliographic details
- Authors: Luca A Ricci, Pierpaolo Benigno
- Published: March 1, 2009
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451871814.001

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### Summary findings
- Wage setters account for future consequences of current wage choices when downward nominal wage rigidities are present.
- A closed-form solution for a long-run Phillips curve relates average unemployment to average wage inflation.
- The long-run Phillips curve is virtually vertical for high inflation rates but becomes flatter as inflation declines.
- Macroeconomic volatility shifts the Phillips curve outward, implying stabilization policies affect the trade-off.
- Nominal wages tend to be endogenously rigid also upward, at low inflation.
- When inflation decreases, volatility of unemployment increases whereas the volatility of inflation decreases; this implies a long-run trade-off between the volatility of unemployment and that of wage inflation.

### Mechanisms and analysis
- Downward nominal wage rigidities alter wage-setters’ forward-looking optimization, generating changes in the shape of the long-run Phillips curve across inflation regimes.
- Increased macroeconomic volatility worsens the unemployment-inflation trade-off by shifting the Phillips curve outward.
- Endogenous upward nominal wage rigidity emerges at low inflation, reinforcing asymmetries in wage adjustment.
- Changes in inflation levels produce opposite effects on volatilities: lower inflation → higher unemployment volatility and lower inflation volatility.

### Policy implications and recommendations
- Stabilization policies can play an important role in shaping the inflation-unemployment trade-off because macroeconomic volatility shifts the Phillips curve outward.
- Policymakers should account for endogenous wage rigidities (both downward and upward at low inflation) when designing policies aimed at reducing unemployment without igniting inflation.
- Managing macroeconomic volatility is crucial to improving long-run outcomes on the Phillips curve and reducing adverse volatility trade-offs.

*Source: The Inflation-Unemployment Trade-off at Low Inflation, IMF Working Papers.*

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## Content in this bundle

- **_wp0934 — Introduction, sections 5.3, 6.1 and 6.3**
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_Source: https://www.imf.org/en/publications/wp/issues/2016/12/31/the-inflation-unemployment-trade-off-at-low-inflation-22360_