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Kiel Institute for World Economics Kiel Working Papers, Kiel Institute for World Economics

No 1312:
Real Wage Rigidities and the Cost of Disinflations

Guido Ascari and Christian Merkl

Abstract: This paper analyzes the cost of disinflation 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 disinflation implies a prolonged slump without any need for real wage rigidities.

Keywords: Disinflation, Sticky Prices, Real Rigidities; (follow links to similar papers)

JEL-Codes: E31,; E52; (follow links to similar papers)

18 pages, February 2007

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