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The Real Effects of Credible Disinflation in the Presence of Real Wage Rigidities
Author(s) -
Tesfaselassie Mewael F.
Publication year - 2019
Publication title -
economica
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.532
H-Index - 65
eISSN - 1468-0335
pISSN - 0013-0427
DOI - 10.1111/ecca.12288
Subject(s) - disinflation , economics , boom , wage , real wages , monetary economics , slump , inflation (cosmology) , inertia , keynesian economics , labour economics , monetary policy , physics , thermodynamics , compressive strength , classical mechanics , environmental engineering , theoretical physics , engineering
The paper re‐examines the real effects of credible disinflation in the presence of real wage rigidities and non‐linear dynamics. A credible, gradual disinflation is shown to lead to a delayed output slump along the transition path if real wage rigidities are sufficiently strong. This result is novel and holds across alternative models of nominal inertia—price staggering and price adjustment costs. In the special case of a cold‐turkey disinflation, price adjustment costs imply an immediate but short‐lived slump while price staggering implies a long‐lasting boom.