Credible Disinflation and Delayed Slumps under Real Wage Rigidity


  • Tesfaselassie
  • M.

The paper studies the effects of credible disinflation in the presence of real wage rigidity, comparing the Calvo and Rotemberg price setting mechanisms (the two popular variants of the New-Keynesian model). In both types of models, a credible, gradual disinflation is shown to lead to a delayed slump in output along the transition path. The delayed-slump result is novel and owes to negative real wage growth along the transition path, whose effect is amplified by the degree of real wage rigidity.


JEL Classification
E31, E50