Real wage rigidities and the new Keynesian model
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- dc.contributor.author Blanchard, Olivierca
- dc.contributor.author Galí, Jordi, 1961-ca
- dc.contributor.other Universitat Pompeu Fabra. Departament d'Economia i Empresa
- dc.date.accessioned 2017-07-26T10:50:15Z
- dc.date.available 2017-07-26T10:50:15Z
- dc.date.issued 2005-04-01
- dc.date.modified 2017-07-23T02:10:05Z
- 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.format.mimetype application/pdfca
- dc.identifier https://econ-papers.upf.edu/ca/paper.php?id=912
- 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.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.accessRights info:eu-repo/semantics/openAccess
- dc.rights.uri http://creativecommons.org/licenses/by-nc-nd/3.0/es/
- dc.subject.keyword oil price shocks
- dc.subject.keyword inflation targeting
- dc.subject.keyword monetary policy
- dc.subject.keyword inflation inertia
- dc.subject.keyword Macroeconomics and International Economics
- dc.title Real wage rigidities and the new Keynesian modelca
- dc.type info:eu-repo/semantics/workingPaper