Real wage rigidities and the new Keynesian model

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Journal of Money, Credit, and Banking, supplement to vol. 39, nº1, 2007, 35-66
http://hdl.handle.net/10230/467
To cite or link this document: http://hdl.handle.net/10230/467
dc.contributor.author Blanchard, Olivier
dc.contributor.author Galí, Jordi
dc.contributor.other Universitat Pompeu Fabra. Departament d'Economia i Empresa
dc.date.issued 2005-04-01
dc.identifier.citation Journal of Money, Credit, and Banking, supplement to vol. 39, nº1, 2007, 35-66
dc.identifier.uri http://hdl.handle.net/10230/467
dc.description.abstract Most central banks perceive a trade-off between stabilizing inflation and stabilizing the gap between output and desired output. However, the standard new Keynesian framework implies no such trade-off. In that framework, stabilizing inflation is equivalent to stabilizing the welfare-relevant output gap. In this paper, we argue that this property of the new Keynesian framework, which we call the divine coincidence, is due to a special feature of the model: the absence of non trivial real imperfections. We focus on one such real imperfection, namely, real wage rigidities. When the baseline new Keynesian model is extended to allow for real wage rigidities, the divine coincidence disappears, and central banks indeed face a trade-off between stabilizing inflation and stabilizing the welfare-relevant output gap. We show that not only does the extended model have more realistic normative implications, but it also has appealing positive properties. In particular, it provides a natural interpretation for the dynamic inflation-unemployment relation found in the data.
dc.language.iso eng
dc.relation.ispartofseries Economics and Business Working Papers Series; 912
dc.rights L'accés als continguts d'aquest document queda condicionat a l'acceptació de les condicions d'ús establertes per la següent llicència Creative Commons
dc.rights.uri http://creativecommons.org/licenses/by-nc-nd/3.0/es/
dc.title Real wage rigidities and the new Keynesian model
dc.type info:eu-repo/semantics/workingPaper
dc.date.modified 2014-06-03T07:14:16Z
dc.subject.keyword Macroeconomics and International Economics
dc.subject.keyword oil price shocks
dc.subject.keyword inflation targeting
dc.subject.keyword monetary policy
dc.subject.keyword inflation inertia
dc.rights.accessRights info:eu-repo/semantics/openAccess


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