This paper analyzes the cost of disination under real wage rigidities in a micro-
founded New Keynesian model. Unlike Blanchard and Galí (2007) who carried out a
similar analysis in a linearized framework, we take non-linearities into account. We
show that the results change dramatically, both qualitatively and quantitatively, for
the steady states and for the dynamic adjustment paths. In particular, a disination
implies a prolonged slump without any need for real wage rigidities.
- real rigidities
- sticky prices