The Inflation-Unemployment Trade-Off at Low Inflation

48 Pages Posted: 18 Mar 2009

See all articles by Pierpaolo Benigno

Pierpaolo Benigno

Luiss Guido Carli University; Einaudi Institute for Economics and Finance (EIEF)

Luca A. Ricci

International Monetary Fund (IMF) - Research Department

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Date Written: March 2009

Abstract

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.

Keywords: Working Papers

Suggested Citation

Benigno, Pierpaolo and Ricci, Luca Antonio, The Inflation-Unemployment Trade-Off at Low Inflation (March 2009). IMF Working Paper No. 09/34, Available at SSRN: https://ssrn.com/abstract=1361376

Pierpaolo Benigno (Contact Author)

Luiss Guido Carli University

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Einaudi Institute for Economics and Finance (EIEF) ( email )

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Italy

Luca Antonio Ricci

International Monetary Fund (IMF) - Research Department ( email )

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Washington, DC 20431
United States
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