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The Inflation-Unemployment Trade-off at Low Inflation

Author/Editor: Benigno, Pierpaolo | Ricci, Luca Antonio
Authorized for Distribution: March 1, 2009
Electronic Access: Free Full Text (PDF file size is 790KB)
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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.
 
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Series: Working Paper No. 09/34
Subject(s): Wage policy | Inflation | Unemployment | Price adjustments | Economic models
Author's keyword(s): Phillips curve | downward nominal rigidities | inflation | unemployment
 
English  
    Published:   March 1, 2009        
            Format:   Paper
    Stock No:   WPIEA2009034   Pages:   46
    Price:   US$18.00 (Academic Rate: US$18.00 )
       
     
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